THE CASTLEMOORE INVESTMENT COMMENTARY
In late August trading volumes are light and most desks are staffed by the juniors – its sort of like telling your younger brothers and sisters that you’re in charge because you’re the oldest at 12. That being said, many nascent trends (and wars, in fact) germinate at this time. This brings us to the late summer in 2001 where it seems we may find this market’s doppelganger, but with some significant differences.
In 2001 we did not have such a pace (or ROC) in deflationary forces, nor did we have the credit contractions to deal with. Unlike in previous recessions this one was based almost solely on credit not inventory. In an inventory-lead recession you work it off the excess, then away you go rebuilding. Today corporate earnings are -25% and revenues, -26%. In 2002 they troughed at -10%. After cost-cutting got companies to their numbers they better have an encore that includes actual growth. Today the S&P on any fundamental measure, let alone a technical one, is quite expensive and expansionary. Unless, Bernanke is going to kick the can down the road for someone else to deal with, these markets cannot be fixed by force-feeding credit to the consumer who makes up the biggest chunk of GDP without some piper being paid somewhere, sometime.
One interesting observation of late (see chart below) is that the bond market has been showing divergences of its own. While the equity markets have been on an upside tear on minimal volume the bond markets have been shrugging off bad news and bad trading days by making higher lows. Though it’s a short-term observation, when coupled with other with bits of information such as the recent auction’s bid-to-cover ratio well above consensus expectations and the YoY increase in country holdings of Treasuries, our propensity to add to such positions, the C$ withstanding, is increasing. Yesterday, amid more auctions the 10 year broke to new short term highs.
The chart below shows the largest holders of US debt. Of interest is the change in ownership in the last year when the headline talk was that US debt (and the US dollar) was not a place to be with all the “printing” the US was doing to fund the stimulus programs. Over the last year the following countries and regions raised their ownership of US treasuries: Russia +330%, Caribbean Off-Shore districts +74%, Oil Exporters +28% and China +50%.
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Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.
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Comments in Tech Talk reports are the opinion of Mr. Vialoux. They are based on technical, fundamental and/or seasonal data that is believed to be accurate. The comments are free. Mr. Vialoux receives no remuneration from any source for these services. Comments should not be considered as advice to buy or to sell a security. Investors, who respond to comments in Tech Talk, are financially responsible for their own transactions.