All Hands Down

Looks like investors couldn’t win yesterday, unless they were short stocks, metals, and foreign currencies.

Stocks were down: Did you see how the popular media played the 135-point selloff in the Dow yesterday? All the news reports I saw said concerns about rising interest rates, higher tensions in Iraq, and the cooling of the Chinese market were to blame for the selloff.

That’s not the way I read it. In fact, I see all three attributes as falsities. The stock market discounted higher interest rates a long time ago. As I’ve often commented, the bond market has been telling us for a while that higher rates lie ahead. There have been darker days in Iraq than yesterday, and the Chinese “cooling” is overblown big time (see my comments below).

Some company earnings reports have been great, but the market is selling off instead of rising. Why? What is the real reason? I’ll tell you what I think it is: The economy is not as strong as economists and analysts see it. The real story is obvious: The market sold off yesterday because it knew today’s report of U.S. economic growth of 4.2% in the first quarter would be far below the consensus growth estimate of 5%. And I also think the market is concerned about the overbearing sea of debt out there. That’s why we have the sudden rush to U.S. dollars.


Gold was down: News out of China of monetary tightening caused a selloff in commodity prices. The government in China would like to see industrial production grow at its target of 10% to 15% per annum, not the current 17%.

Chinese Premier Wen Jiabao is introducing tightened lending restrictions for banks and imposing tougher capital requirements for those companies in the construction sector. Gold, silver, nickel, copper and aluminum all moved lower yesterday on the “China” news.

Personally, I see the reaction to the industrial production tightening in China as overblown. Controlled growth makes a lot more sense in the long-term than out-of-control growth and the social problems that come with it. Reducing growth from 10% to 15% from 17% still equals strong demand for the metals.

Somebody once said making money is about buying when everyone is selling and selling when everyone is buying. My charts show gold undervalued at US$375 per ounce. Unless there are other market changes, I intend to be buying gold shares if the $375 U.S. per ounce price is hit. I’ll keep you posted.

Foreign currencies were down: The Australian, New Zealand and Canadian dollars all fell yesterday… with analysts blaming the weak metals market. That’s not the true story.

The Canadian dollar, which fell the most yesterday, was down because Nortel shares tumbled about 30% after the company fired its CEO and two other senior executives. Americans and foreigners are huge investors in Nortel. When they heard the news they basically said, “Oh no, not again!” and dumped Nortel shares–some taking the view that Canada may be no better than Mexico when it comes to finances. And again, an overblown reaction causing the Canadian dollar’s single biggest one-day loss in 20 years.

As I mentioned a few commentaries ago, it’s a global market place now. All markets… stocks, metals, currencies… move quicker than ever before. That causes severely oversold and overbought situations that investors can take advantage of.

Right now, the flight is to American dollars. Could it be that higher rates are expected? Could it be that investors are jumping out of the stock and bond markets and moving to U.S. dollars in the short term? Could the market be worried about the huge debt bubble that’s been created and how rising rates will affect its repayment? I see it as a combination of all three factors.