When the whole world shits the bed, USTs are the place to be... and those are denominated in dollars... plus a lot of foreign-deployed U.S. based capital returns home in the event of a "risk off" event -- thus exiting global markets and repatriating back into $USD.
Global Macro Notes: Fear and Loathing Return We were somewhere around Barstow, on the edge of the desert, when the drugs began to take hold... - Fear and Loathing in Las Vegas The focus coming into the week was on the Federal Reserve, and how FOMC day would play out. All told, the Fed's actions could roughly be cast as in line with expectations -- not too hot, not too cold, and well telegraphed beforehand. We knew going in that the Fed would downgrade its outlook for the economy. We also knew there was trial balloon talk of monetizing US treasurys. And as expected, the Fed 'opened the door' for more QE (quantitative easing) without flinging it wide just yet -- again, more or less the telegraphed middle path. So far, so good. But then Mr. Market took a frying pan to the face -- consecutive frying pans actually -- via ugly numbers and policy directives from China, followed up by bad news from Japan and the UK and Ireland, all topped off with a grim U.S. trade deficit. Read the full comment here
How about some discussion of valuations and expected long-run returns, rather than just short-term macro themes. With high quality, low-debt, blue chip multinational franchise stocks selling at 8-10% earnings yields, compared to 2.8% on US Treasuries, one has to ask how important some temporary macro headwinds are going to be.
Feel free to get the ball rolling, as you clearly have an opinion here... The first devil's advocate question I would ask is, which blue chip franchises do you see at an 8-10% yield, and if the case for value there is as compelling as you suggest, why are investors falling all over themselves to lend to IBM at 1% and McDonald's at 3.5%. Also, how about Hussman's take on misvaluation via questionable forward operating earnings estimates, coupled with his assertion that, by more reliable historical measures, stocks are ~ 40% overvalued. Re, expected long run returns, I would have to ask, expected returns for whom and regarding what strategy? The viewpoint of a swing trader, for example, will be very different than that of a long-term investor... as will the viewpoint of someone with a "fully invested" mandate versus another who is comfortable using rapidly-deployed leverage and switching in and out of cash... Also, whether the macro headwinds are "temporary" or severe and lasting seems a major debate of the day, and not something trivial in the least... if China turns out to be a potemkin village, for example -- or at least a grossly overhyped / overinflated one -- then it could be a very rough couple years ahead for the global economy.
Darkhorse, on a more pedestrian note, how does your macro analysis affect your actual trading? Would it override setups on your chart or whatever cues you may take from price action, be it for entry or exit?
There is no "override"-- it's all fully integrated. It's a great question. I've got a descriptive process metaphor that frames the answer well, but it needs a little polishing. Let me get back to you on that with more details soon (and remind me if I forget)...
Weekend comment / links roundup: Charlie Brown market This market reminds me of the classic Peanuts routine with Charlie Brown and the football. Every time Charlie Brown would run to kick the football, Lucy would pull it away. Charlie Brown would then go flying, typically landing on his head. That seems to sum up the dynamic between the bulls and the bears for 2010. The bulls have gotten repeated running starts... but every time, the football gets pulled away by the bears. (The consequence of front-loading all that stimulus joy into 2009, perhaps, leaving only dregs to follow?) And now, with the Fed looking impotent, the $USD surging, China feeling seasick, austerity measures kicking in for Europe, and the Q4 'crash season' looming, we are headed into distinctly ursine territory. Stay nimble out there... Go here for the 8-15 links roundup
Hi Darkhorse. I was wondering why I had missed your work. Of course, you stopped posting a few months before I started. Thanks to gabfly for the dropping your name. Great analysis and website. I don't trade fundamentals but enjoy reading anything related to market movement and history. Thanks for posting. Best of luck and good wishes.