The “Sausage Market”        

Monday evening, July 13, 2009

It seems as though there are as many possible definitions of the kind of market we’re in right now as there are definitions of “flation” (which we’ll talk about in the July issue, to be posted on the Members Only page by this weekend.)  You know us; we remain 100% convinced that we are in a secular bear market.  Since early spring, we have been in a cyclical bull market which, by most appearances (but not all, yet) is over. These terms, as you already may have guessed, refer specifically to stocks.

Most commodities--conspicuously led most recently by oil--are probably still in a secular bull market. For several weeks, they appear to have been moving into a cyclical bear market. Neither of these two things, however, is anything we are yet willing to bet 100% on.

More confusing still is the behavior of the Treasury market; there, the schizophrenic behavior has sometimes changed on a weekly basis. For several weeks, bonds were in at least a cyclical bear phase. Due to the massive amount of borrowing both present and future on the part of the Treasury, the only real question seemed to be whether the cyclical bear phase would mature into a secular bear market for bonds. Just when it seemed likely to happen, however, interest rates suddenly dropped, and now we question whether bonds may again be in some kind of a bullish phase.

But the most frustrating market of all--and one which, at the moment, is frustrating any attempt at definition--is that of the world's reserve currency: the US dollar. More often than not for many months now, the dollar's behavior seemed to directly affect most other asset classes: if the dollar dropped, stocks and commodities rose and bonds fell. If the dollar moved higher, the opposite occurred with all of these. So reliable was this relationship the great majority of the time, in fact, that the dollar would even respond itself to moves which first came in one of these other areas. For instance, if bonds rallied (meaning the current yield fell), the dollar also rose. If oil declined, the dollar would rally; and vice versa.

For the last couple or three weeks, however, the dollar has become stuck in a narrowing trading range. Neither bulls nor bears on the greenback can claim the upper hand; and this not only to their frustration, but also to those also trying to use the dollar to help determine the near-term direction of everything else.

Thus, it seems to us that the most apt description of everything right now would be a sausage market. A myriad of ingredients--usually, ones that don't complement one another--has been mashed and ground together to give us a fatty, indigestible, confusing mass of something.

In the next 24-48 hours, we'll be posting to the Members Only page a quite detailed look at where all of these markets are currently. We'll talk more about the conflicting cross currents that have made the near-term direction of just about everything difficult to call. Much could be settled in just the next several trading days, however; and, so, we’ll also be laying out for you the two or three most likely scenarios and what moves you will need to make when it is clear which of those will be unfolding.

To give you just one illustration (or preview, if you will) now of the kinds of subjects we’ll be discussing, we wish to speak for just a moment about oil. It was a mere two months ago--that's only about eight or nine weeks, folks—that crude oil trading around $60 per barrel was a cause for rejoicing. Having come up from well below $40, it showed that deflation had been vanquished, reflation was taking hold, Washington's attempts at stimulating the economy might be bearing at least a little fruit, and maybe Barack Obama would not be a one-term president after all. Now, crude oil trading around $60 per barrel suddenly means the opposite of most of this, and then some. Go figure.

Oh--and by the way, there is the fact that the US dollar has done just about zilch in the face of a nearly 20% decline in oil.

So, subscribers, keep a close watch on your inbox for news of this next posting.

TTFN!

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