The price action is incredibly interesting so far this week.  Here are a few thoughts, including some follow-up on issues I've mentioned previously.

Bank of America:  I had previously mentioned that BofA (ticker BAC) was effectively bankrupt and trading as such, except with an idiotically high stock price.  Although my short-term timing is often hilariously bad, in this case the stock has gone straight down over 10% from almost the moment I wrote about it.  There has also been speculation that the upcoming Wikileaks release of bank information will be from BofA.  Whether or not that turns out to be the case, this stock is still a great short if one can take a lot of volatility.  Anyone who owns this (or any other commercial bank) stock is a fucking moron.

General Motors:  My opinion that GM (ticker GM) was a good medium-term buy on the open of the first day of trading hasn't proven to be terribly impressive so far.  The offering has suffered from a fair amount of indigestion as many who managed to get in on the IPO seem to have taken a quick profit in the stock.  On the other hand, my cynicism seems to have been well founded as the stock has yet to trade down through its IPO price of 33 and is now rallying back, even in the face of a declining market.  My short-term timing of purchasing on the public trading open was admittedly crap, but my opinion that this is a good medium-term buy is starting to look better.  The jury is still out on this one.

Consumer Stocks:  If there is one thing propping up this market, it's consumer stocks.  The best measure of this is SPDR S&P Retail ETF (ticker XRT).  With the economy getting worse again and the consumer increasingly strapped, to say that this is hard to believe is quite the understatement.  However, as the old saying goes, "The market can remain irrational longer than you can remain solvent", so I wouldn't be looking to fade this yet.  This sector has upward momentum and a life of its own, similar to tech stocks back in 1999/2000.  At some point, it will all end in tears, but I'd need to see some serious proof of an end to the momentum before shorting this sector.

Oil:  Oil is whipping around as much as two percent a day.  This is a crazy amount of volatility for the biggest consumable commodity market in the world.  At the same time, the net movement in Oil is very small.  It's been trading around $83 to $85 a barrel for quite a while now.  This kind of volatility with little net price movement is indicative of something that's trying to digest two strongly competing factors before making its next big move.  In the case of oil, the competing factors are quite clear:  inflationary printing of fiat currencies vs. deflationary economic forces reducing demand.  I have no strong opinion on the direction in which this will eventually resolve; however, I'm of the opinion that if oil breaks down, the stock market will collapse even more strongly (and largely for the same reasons).

Precious Metals:  What can one say?  In the face of increasing stock market weakness, gold and silver have taken off again.  This is a clear indictment of global monetary policy.  There are also serious supply/demand factors at play, especially in silver.  It looks like some very large players may be standing for December delivery at the COMEX (the primary US metals exchange), which has the potential to cause a short squeeze of epic proportions.  If you're not reading the precious metals commentary at Along the Watchtower, you're missing out, as the author has been so perfect in his market calls it's spooky.

The stock market is hanging by a fraying thread.  The only thing holding it up at all is Fed monetization and some vague hopes about holiday sales.  If it collapses, the question becomes whether other risk assets will collapse along with it.  This goes back to the question of whether a 'wealth preservation' strategy or simply holding cash is the best option.  With all western nations monetizing as quickly as they can get away with, I still believe wealth preservation will win out over the long run.  In the short run, however, a sharp downward move in the stock market would likely lead to a similar move in commodities, especially oil.

Posted by: Hermit Dave at 02:10 PM | No Comments | Add Comment
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