Submitted by Yves Lamoureux of Blackmont Capital
I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. Good news about this will also turn out to be bad when the party is up.
The party by the way is almost up.The not so smart money of 2008 might be getting its mojo back.If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.
One huge problem is that the bulk of the long side is now carried by speculators with cheap money.A simple rule of WallStreet where bulls die from their own weight my apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. Thats been my point throughout 2007. Perhaps an early call but the right one nevertheless.
We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies.
The cracks starts to appear in select markets first.We have observed a number of those already.
We did fire our first gold warning recently even though we have been long term bulls.
The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.
You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come.
I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have got their mojos back.
They are relatively short in big ways in too many market. For that reason alone it bears watching as this is a significant development.
The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends…..
Yves Lamoureux, Investment Advisor, Blackmont Capital inc.
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