Wednesday, January 5, 2011


After early weakness, the market's reaction to the better-than-expected economic releases was far better than I had expected.

A nice win for the bulls today as risk remains on.

Gold's Near-Term Risks

Gold's inability to have a dead-cat bounce today probably augurs poorly for the price over the short term. As I see it, here are some of the near-term fundamental/sentiment risks to the price of gold:

* Investors might grow increasingly comfortable in a self-sustaining, inflation-free worldwide economic recovery.

* Real interest rates could ratchet higher, providing competition for non-income-producing assets (like gold).

* The world stock markets could surprise to the upside, reducing investors' interest in real assets (like gold).

* The U.S. government might (astonishingly) address the deficit.

* QE2 could mark the end of U.S. quantitative easing.

Run, don't walk, to read the Dallas Fed piece on housing, which was published during the holidays.

S&P vs. Junk

It is interesting to note the developing divergence between the S&P 500 and junk bonds.

Commodities Continue to Get Crushed

The commodities schmeissing continues today, with crude oil, gas, cocoa, coffee, corn, cotton, wheat, sugar, soybeans, oats, copper, gold and silver all down.

ADP Above and Beyond

The ADP report was well above expectations, at 297,000 against expectations of 100,000 growth.

Noteworthy was the large rise (270,000) in service employment, which, according to Miller Tabak's Dan Greenhaus will be the eleventh consecutive increase and the largest monthly increase ever in the ADP survey.

But as Dan cautions ADP has been off by an average of 71,000 jobs per month, and December is filled with statistical aberrations.

After a gap lower in futures overnight, the report has served to stabilize and then rally the futures.

It will be interesting to watch how the market reacts to the news.

I will remind everyone that it is not necessarily the news that counts; it's the way that the markets respond to the news that holds the key to future stock market performance.

The jobs picture has brightened somewhat, but the large roster of unemployed will remain with us in the new year owing to a structural disequilibrium in the labor market and the secular rise in hiring temporary workers (at the expense of permanent positions). As mentioned previously, wage deflation and rising costs of living are a toxic combination for the middle class that dominates our economy and spending (see screwflation).

I am especially concerned that some portion of the better economic figures (especially of a retail kind) is likely a byproduct of "recession fatigue."

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