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The Meltup Continues; What Does It All Mean?

Posted by Larry Doyle on September 11th, 2009 2:44 PM |

What does it mean when virtually every asset class is increasing in value? Is this an indication of a ‘Goldilocks’ market in the context of an economy with widely disparate winners and losers? Can virtually all the different sectors of the market be trading off underlying factors and fundamentals which benefit that asset class? Let’s navigate the different sectors of the market and ask the difficult questions.

Equities

Have companies so improved their balance sheets so as to thrive in the midst of mediocre sales volumes?

Will exports increase so dramatically as to replace weak domestic consumption?

Are valuations sufficiently cheap as to warrant aggressively adding to positions currently?

Is the rally an Uncle Sam induced rebound in the midst of adapting to an entirely new economic dynamic?

Bonds

Why do government interest rates continue to decline in the face of overwhelming supply and a greenback under pressure?

Is the bond market sending warning signals of growing deflationary pressures? If so, can that possibly be good for equities?

How does a bond market continue to rally even as Uncle Sam’s quantitative easing initiative is starting to wind down?

Is the rally in U.S. government debt a warning signal of an economic relapse or proverbial double dip? How do investors reconcile the price action in both bonds and stocks?

The Dollar

The one segment of the market not finding much favor.

How can the dollar decline and the other sectors of the market rally? Isn’t that counterintuitive? A declining dollar is ultimately inflationary. Is that expectation of inflation overwhelmed by the growing deflationary pressures elsewhere within the economy?

Commodities

Has the improvement in oil specifically been a reflection of global economic demand or more a function of a weak dollar?

Is the recent retreat in the Baltic Dry Index forecasting a further pullback in the prices of commodities?

Do emerging market stocks accurately reflect this retracement within the BDI?

Will we have inflationary trends overseas while we experience disinflation or deflation domestically?

Conclusion

The markets do present opportunities for short term traders. As a former trader and currently a long term investor, whenever I have more questions and uncertainties than answers and revelations, I am inclined to reduce risk rather than add to it. Some may say I am going to miss out on further price appreciation for selected assets. I would respond that I am playing a different game.

Thoughts, comments, questions always appreciated.

LD






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