• 287 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

Tesla Struggles To Compete In European Market

Tesla Struggles To Compete In European Market

Tesla continues to catch the…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

  1. Home
  2. Markets
  3. Other

BarKeeper's Friend

BarKeeper's Friend

He came, he saw - he tapered.

In a fitting bookend to his storied command of the world's largest and most powerful central bank, Bernanke trimmed our cocktail punch to the tune of $10 billion proof per month. The worlds greatest barkeeper will take us down easy.

The impact to the market?

We think it's appropriate to let the dust settle before making any real adjustments to our respective postures. All things considered, any taper was a welcomed signpost along the road and one we have expected. The most important thing - regardless of size, was the signal was made to the market.

Since the Fed aborted the September taper, we have been waiting for long-term yields to turn down. Historically speaking, one could argue that the move higher in yields in the10-year note is as stretched as it has ever been in the past 50 years. If the Fed had tapered three months back, these pressures would have very likely relieved themselves by now. But alas, and thanks to Senator Cruz's magnanimous and benevolent gestures (sarcasm) this fall - better late than never.

50-Year Chart of 10-Year Yields
Larger Image

We believe yields are going through a retest of their September highs. Although it's not a perfect comparison - it's the thought that counts - these days, with respect to our more esoteric policies and their impact to participants downstream expectations.

10-Year Yield Chart 2004 versus 2013
Larger Image

What has historically happened when the market digests the Fed's move away from extraordinary measures? Yields come in, the bond market does well relative to equities and precious metals outperform. Even if QE is slowly phased-out as the Fed has decreed, it appears reasonable to believe that similar dynamics will develop sooner rather than later - considering how historically stretched the markets are today.

1990-1996 vereus 2009-2014 10-Year Yield:SPX
Larger Image

Gold and inflation expectations have been negatively impacted from several different sides over the past few months. A weakened yen, disinflation on our shores and deflationary concerns in China and abroad just to name a few. With a surging interest rate environment that has yet to subside, real rates have risen. The US dollar - typically the vampire slayer of secular trends in precious metals, has not played a significant role over the past year in the precious metals sector - rates have.

From a historical perspective, the correction in gold relative to yields is at an extreme commensurate with significant lows in gold. All bets are off if real rates continue to rise, but with the taper now written in the ledger and growth starting to reaccelerate here and abroad - inflation expectations should begin to turn up, perhaps quite considerably. Considering how stretched yields have become, the angle of incidence should equal the angle of reflection.

Gold:TNX versus Gold Chart
Larger Image

Some might be surprised to find that in a week which saw such pronounced weakness in gold - the silver:gold ratio was actually materially higher. We have favored silver relative to gold since this summer and believe that the current market has some similarities in this respect to the 76' low in which silver bottomed several months before gold and where the silver:gold ratio was rising.

1972-1976 Gold and Silver versus Silver:Gold
Larger Image

1979-1983 Gold and Silver versus Silver:Gold
Larger Image

2009-2013 Gold and Silver versus Silver:Gold
Larger Image

Once the dust settles from the taper, we will be looking for inflation expectations to reaccelerate. Concerns with our reflationary thesis would be heightened if the silver:gold ratio once again broke down. For now it continues to follow the script from our cycle comparative with the historic Nasdaq market.

1998-2003 NFX:SPX Ratio versus Silver:Gold Ratio
Larger Image

A quick look around the horn:

In light of the Fed's actions this week, we believe that Santa may have come early this year. Although seasonality strongly favors equities throughout the end of the year, a broadening top formation - similar and mirrored to how QE3 commenced has been developing over the past several weeks.

SPX Daily Chart
Larger Image

Our 95' comparative performance profile has been an excellent guide for us throughout the year. Although we do not expect the market to break below long-term support (currently ~ 1596), our suspicions are the performance profiles will begin diverging early in 2014.

SPX Monthly Chart
Larger Image

The Shanghai Composite Index had a poor performance this past week. Further concerns with their interbank market kept significant pressures on China's equity markets. Although we are closely watching China as a key component and proxy for our reflationary thesis, we don't expect to be eating any humble pie, served a la Krugman - anytime soon.

2008-2009 Shanghai Chart
Larger Image

1980-1983 SPX versus 2008-2013 Shanghai Chart
Larger Image

Officials in Japan succeeded at jawboning the yen lower with promises of further stimulus. Having said that, it's influence on Japan's equity indexes - specifically the Topix and corresponding ETF - EWJ - have been marginal.

2011 Siulver versus 2013 Japan Chart
Larger Image

Not surprisingly, the bloom came off Apple this past week. Similar to the previous stairs it has climbed since making a spring low, a consolidation of recent gains was to be expected.

Apple 2013 versus Oil 2009 Chart
Larger Image

Wishing everyone a very Happy Holidays and a safe and healthy New Year.

 

Back to homepage

Leave a comment

Leave a comment