to HomeTuesday evening-- February 1, 2011
Over the weekend I questioned whether the one-day reversals in most asset markets of last Friday would prove lasting, depending on what was happening in Egypt. Today, we got a few possible answers to that, even if we are still dealing with a very murky and very fluid situation that could change on a moment's notice.
Unlike what happened through the weekend, there was almost a party atmosphere during the daylight hours in Cairo today. CNBC's Erin Burnett, on location there, described the crowds out in the street as "incredibly peaceful," additionally remarking about the large numbers of small children there with their families. Tanks were parked everywhere; but rather than menacing the crowds, they almost seemed but a reminder that, in the end, the military rulers of the country would make sure that order was restored.
Accordingly, pretty much everything behaved the opposite of what we saw at last week's end. Stocks soared today on the relative calm for several reasons beyond even that, as I'll describe below. Oil weakened. Gold managed a small rally, but only grudgingly so; this, despite (really because of, as I explain in the new issue of The National Investor) the fact that the U.S. dollar got massacred. Treasury bonds sold off; though as I'll also describe below, not nearly as much as one would have expected.
It will be interesting to see if this ebullient mood exhibits itself tomorrow as well, given the apparently unwanted "concession" speech today by Egypt's President Hosni Mubarak. The embattled leader promised he won't stand for reelection in September, but that he intended to stay in office until then to help guarantee a smooth transition. He spiced that with a veiled threat that he (or the military?) might at some point crack down on protesters who threatened this "order." Immediately after Mubarak's speech, tensions started running high again; we'll see if the markets stay cheerful.
Still, today was instructive; even if the rallies in stocks, the plunge in the dollar and all that again reverse themselves for a day or two at some point. The behavior of most assets betrayed the still-underlying desire to behave much as they were doing (with a few exceptions) before Egypt became an issue.
Gold -- Despite a new all-time high for copper (one I think will soon prove fleeting again) gold could only eke out a modest gain. The dollar finally took such a bludgeoning (it is suddenly threatening to reach its lowest point since last November) that gold ticked up a hair. But this seemed to be more in sympathy with other assets' far more impressive rises than its own merits.
The yellow metal is too dangerous to short here; we never know whether the next day or the one after will bring more dire news, and a worse disposition for the markets. If I had a crystal ball and knew that nothing nasty of any consequence would happen in Egypt or elsewhere, I would surely be tempted to advocate that for a spell. But until we see a close above the $1,350 per ounce mark (the peak of the last rebound attempt before the swoon of late last week) gold remains suspect.
Oil -- Here again, if we could see into the future and know that things would not get back to the point of last Friday/Saturday, crude would be ripe to be aggressively shorted. But that's too dangerous as well without a crystal ball. With several emerging market countries at various stages of trying to dampen inflationary pressures and with developed world demand still somewhat weak, oil has no business being at $90 per barrel right now. Traders seemed to understand that as some of the last couple days' fear premium came back out of crude's price today (notably, as West Texas crude failed to exceed its level of earlier this month.)
The market is very well supplied...there seems to be no threat to shipments through the Suez Canal, or through the country's main pipeline. But all of this will matter little if violence returns, and hedge funds and other traders think that oil is where their trades should be going.
Stocks -- By day's end, the fact that the S&P 500 finally closed above 1300 and the Dow Industrials above 12,000 had giddy bulls proclaiming that last Friday's sharp drop WAS the long-awaited correction; and that now that babies were able to join the protesters in the streets of Cairo, the bull market could resume. To be sure, a perfect storm of factors was on the bulls' side today:
-- January saw a 2% plus gain for the S&P 500, its best January rise in several years.
-- Fund flows are typically heavy the first day of the month due to mutual fund and retirement account deposits.
-- Egypt was off the boil today.
-- This morning's ISM manufacturing report was surprisingly strong, though the "prices paid" component revealed anew that Fed Chairman Bernanke is not paying nearly enough attention to the upward price pressure on everything that he is fomenting.
-- Traders who were short the market following the Egypt troubles scrambled to cover as the day went on.
-- The continuation of the U.S. dollar's near-freefall of the last several weeks (interrupted only on Friday) had everyone eager to buy stocks anew.
Barring any big new -- and fast -- ratcheting up of tensions, stocks may be able to extend these moves for a while, now that these key psychological round numbers have finally been overcome (NOTE: Paid subscribers to The National Investor will be receiving separate comments and portfolio instructions on this as warranted.)
The Dollar -- The greenback's strength rally from last November's lows through early January had taken the whole issue of the Bernanke-caused currency war off the table -- or, at least moved it out of the center. Now -- though Wall Street traders are joyous over the cheap dollar "carry trade," the "risk on" environment and all that -- most other countries will be crying "foul" anew.
Barring a new flare-up in Egypt (or elsewhere), in fact, the U.S. Dollar Index -- which closed at 77 even today -- could soon threaten its all-time low of 72 or so reached right before the Lehman bankruptcy and the start of the Great Recession. About the only thing that will keep the dollar from dropping that far at this point is that if things do get worse anew in Egypt. Without that, the Federal Reserve now stands as the one conspicuous central bank that has no interest whatsoever in fighting rising prices.
The bond market -- It remains somewhat of an enigma that given all the above -- especially the fact that Bernanke remains hell bent to inflate even as the European Central Bank suspends its own QE program in order to try to keep higher inflation at bay -- the bond vigilantes have still not punished Treasuries very much. The bellwether 10-year Treasury note has yet to exceed its high yield of 3.53% from back in early December. This will be a key level to watch.
Surprisingly, some of the upward pressure on long rates actually subsided as the day went on today, despite the dollar's beating and the rise in most risk assets. Naturally, some suspect Bernanke's hand at work behind the scenes. This isn't a surprise, given that it was just made known that his bank has just passed China as the world's biggest holder of Treasury debt!
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