Before my brief market commentary today, I’d like to announce that it’s coming to be time for me to resume writing at the blog site I founded in 2008, www.econblogreview.blogspot.com. This Blogger-run site has improved its capabilities and should allow me to come close to the quality that Jeff Harding has achieved with The Daily Capitalist; and, Blogger is free. (Of course, one may snark that since Google runs Blogger, there is nothing so expensive as that which is free.) It has been a privilege to be part of The Daily Capitalist team. Perhaps the best part of the experience has been first meeting, and then becoming close friends with Jeff, and this relationship continues unchanged. Please join me at econblogreview starting soon.
Now to the markets. While complacency in stocks has become widespread, that is not the same as agreeing with Mish that a major stock market top can be called, as he did last night. This is especially true if one is measuring the stock market in (nominal) dollars rather than in T-bond- or gold-adjusted dollars. The amazing collapse in the Japanese yen vs. the USD may, if the relationship stays where it is, lead to further currency depreciation, and over time, businesses are pass-through entities and thus are inflation hedges. And to the extent that strong businesses can keep their dividends growing in price-deflationary times, they can serve as bond alternatives. So I don’t spend too much time trying to call tops in the averages. All I can say is the following: there are only a small number of stocks that I can identify in Value Line’s universe of 3500 large-cap, mid-cap and small-cap stocks that are worthy of my money, adjusted for risk. Not fighting the Fed is different than trusting that it will always rescue stockholders. However, there’s nothing exciting about bonds, cash or commodities right now, either.
The above said, the futures market positioning is strongly “risk-on” in multiple assets. Both Treasurys and gold, however, show no froth in futures positioning. The speculative community is net short the 30-year Treasury enough to suggest that a topping process in yields (i.e. a bottoming process in the price of the bond) may finally be beginning. The Commitment of Traders for gold also looks favorable for gold in my eyes, so I hold to my opinion that gold is poised for relative outperformance versus stocks. Whether this comes more from not dropping if stocks correct, or from playing catch-up on the upside, is not something I have a strong opinion on right now.
But I have converted some muni bonds that had provided both a good yield and had nice long-term capital gains into gold and silver of the “paper” variety over the past two months, as well as into other assets with at least the same yield and the likelihood of higher payouts over time than fixed income provides. Munis have now become fully-priced to Treasurys and are less liquid. I also have been taking profits on some stocks and converting them into higher-yielding or more value-oriented stocks and cash, as rising rates eventually often lead to recession worries in the stock market. Much of the new stock market investment has indeed involved, for the first time in my long investing career, going long foreign ETFs. This has been done solely on valuation and dividend yield basis, and with full awareness that in the short term, they are likely to continue to correlate with the direction of the U.S. stock market. But over time, emerging economies offer the double win of lower valuations and faster growth than in the U.S. At least, that’s the theory. We shall see how things go over the months and years ahead.
Market valuations are simply hostile to new allocation of capital right now, as most assets look fully priced. So I don’t think it pays well to try to thread too many needles, and thus cash may not be trash when adjusted for the chance to purchase assets more cheaply– some year!