Economaton

Financials and homebuilders are on fire. A week on, my forecast is holding up (but expect more volatility!):

Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. climbed in New York Stock Exchange trading and led financial shares to their fourth advance in five days on expectations that reduced borrowing costs will boost profits. Lennar Corp. and Centex Corp. rallied, sending homebuilders’ shares to the highest level since October, as the prospect for lower interest rates overshadowed a government report showing the biggest yearly drop in new-home sales on record.

What can we expect? The markets are still very jittery. Expect volatility. Any unexpected writedown or a million other sundry unforeseeable events could well set off some broad selling, but I think the worst is over. I am (cautiously!) going to regard any selloffs as buying opportunities for more homebuilders and financials, until faced with compelling evidence to the contrary. Why am I so confident? Even during the carnage last week, even on Tuesday, these sectors went up while the rest of the market sold off. This trend shows no signs of abatement.

Other good bets here? Ben Bernanke built his career on the idea that the Fed could have prevented the Great Depression by just printing lots of money, and now is his chance to test his theory. He will almost beyond a doubt continue pumping liquidity into the money market until the equities market stabilizes on a sustained positive trajectory. Therefore, bets on LIBOR to fall more (i.e. LIBOR futures to rise) sound good to me.

The US dollar seems doomed (still.) €1.50 presents important psychological resistance, so we may oscillate here for a while, especially with speculation abounding in the media for a Euro rate cut based on the perceived weakening of the Eurozone economy. I still rate Euros a weak buy based on my belief that the Fed will be forced to cut faster and harder than any cuts out of the ECB.

Russian roubles are an interesting speculative bet. They seem to be decoupling from Euros a bit, and Russia is spinning up capitalism fast. Foreign investment and massive amounts of resources point to a good medium to long term bet here. More on this in a separate article to come.

The Japanese yen remains extremely unpredictable and volatile. Carry trades ebb and flow with the tides, as the crowd spins from panic to greed and back with each new day’s Dow; the Japanese economy remains, by all indications, even worse off than the faltering US and European economies. Any yen bets are very risky but could pay off hugely. I’m staying away for now.

Gold and platinum… I like them here. Both hit fresh nominal all-time highs today, rebounding over last week’s selloff and then some. I’ve read the theory that the selloff was largely to cover bad bets on equities amid the stock market turmoil. This seems reasonable, but who can say whether it’s true or not? In any case, people believed it and bought gold. As I expect worldwide equities, US dollars, yen, and Euros to remain in flux for some time, gold and platinum will correspondingly rise as a refuge for nervous investors.

Oil is grossly overvalued anywhere near $100 due to massive speculative interest (see e.g. this Senate report from 2006 on The Role of Market Speculation in Rising Oil and Gas Prices.) I put a reasonable fundamental price around $50 ±10, though “the market can stay irrational longer than you can stay solvent.” Therefore, look to psychological factors as the main driving forces: indications that the US economy will falter will bounce price down fast; indications of geopolitical instability will drive price up fast (and both temporarily.) I’m not getting near this, since I’m not trading intraday with a fast news line.

There’s much more to cover - China and Latin America, Australian mining, Russian energy, and the oil states of OPEC. Leave a comment below and let us know what you think of all this, too.