Well, that was a very crappy ending for 2005!
I suppose I should learn to be happy with down markets – especially when I call them correctly but, for some reason, I really don’t like playing the downside. I suppose it’s just that I prefer to look at the macro view and don’t like it when the economy is in trouble, even though there is lots of money to be made in a bad economy…
Sadly, it looks like I may have been right on the money calling for a 5% correction in the markets a couple of weeks ago. Lacking any bad news, there should be a bit of a relief rally on Tuesday but it is largely based on getting through the New Year without a major terror incident and expectation that the Fed is done tightening. That may turn around at 2pm with the release of the minutes (or it may continue…).
Oil finished the year at $61.04 so it may not be just light, disinterested volume that drove down the stock markets this week. At the end of 2004, oil was $43.75 and we thought that was out of control! Natural gas is up 82% from last year but if you got this month’s bill you knew that already. The Ukraine gas crisis may have the opposite effect you would think on gas as it may change a trend by Europeans who have been switching from oil to gas, causing natural gas prices to fall, even as supply becomes short. It’s all based on future expectations…
Although it is still very possible that oil was manipulated last week, these year-end commodity moves are going against dollar strength which indicates serious legs to the rally and serious problems for the markets. If oil remains above $60 next week, there may be another good energy play coming up as many oil companies are 10-20% off their 2005 highs.
Gold is not “peaking.” It was at $426 at the end of ’03, $440 at the end of ’04 and it is finishing ’05 at $517. This is a fairly strong price pattern and commodity cycles usually last 20 years so think about that when you listen to the pundits. The 2nd biggest gold company in the world just bought the 4th biggest company for a 40% premium and they were rewarded by the markets – what does that tell you?
The scariest thing I am looking at is the 10 year treasury which is trading at 4.34% up just .08% for the year. As is typical with banks, the 15 year mortgage (which should be very closely tied to this rate) has outpaced it, going from 5.18% to 5.76%. The 30 year has moved the most, from 5.75% to 6.22% but none of this seems to be a problem until you think about the Fed Funds Rate which has almost doubled from 2.25% to 4.25%.
The rate differential is like a rubber band ready to snap and a sharp rise in rates will grind many sectors of this economy to a screeching halt that the Fed will be ill prepared to deal with, especially if it happens in the first quarter, before Bernanke has a chance to settle in and gain a consensus.
This makes me very concerned about the next few months so I will be approaching the markets with caution coming into the new year,
I have some longs on oil and gold but I won’t be doing too much until I see how next week shapes up. For the most part, I will not be trusting Tuesday as people get back from vacations and it will take most funds a couple of days to decide whether they are really buying or selling for the new year.
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Best case scenario for 2006 would be:
An end to Fed tightening (not as likely as everyone thinks with Bernanke in charge)
Housing slowing but not stopping, sending investment dollars into stocks
A light at the end of the Iraqi tunnel.
Democratic control of just one of the house or senate (markets love it when laws can’t be changed)
A Nasdaq charge led by Microsoft (not looking good atm)
GM recovery (if they can work it out, the Dow will fly).
I’m not going to talk about worst case but any three of the above not happening will do the trick!
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The biggest thing we can count on next year is old age. The original vintage 1946 baby boomers officially hit 60 next year and you will be totally sick of hearing about it by March. That means we need to look at stocks like SRZ, UNH, ZMH and many more very closely early on. Any “rally” that is spurred by health care will have no implications for the broader market and the aging population scenarios will start to worry people that we are going to head into a secular Euro-style decline in the next decade.
The worst thing that is likely to happen is that the Democrats will hammer the Social Security issue into November as a huge looming crisis (it is) that the Republicans are failing to deal with (they are). This will depress people and really hurt the markets.
