Monday, March 13, 2006

Blog of the Week: Technically Speaking

Conor's Market Overview

Educational use only. Never intended as advice.

The "deflation trade" was in full effect this week. The S&P was down 6. The NDX was down 36. These numbers mask how bad the damage was, as the number of declining stocks on the NYSE significantly outpaced the number of advancing stocks until Friday's relief rally. Deflation wasn't confined to stocks, though. Crude oil was down about $3.50 to $59.96. Natural gas fell 13 cents to $6.65. Gold fell $24 to $541. Silver fell 39 cents to $9.93. Zinc was down 3%. Aluminum was down 4.4%. Lead was down 3.8%. Copper was down 2.8%. Editor's note: paradigm shift or mean reversion opportunity?

But that still isn't everything. Global bonds fell as well, shifting global long-term rates up. The US 10-year bond's yield rose 7bps to 4.76%. Japan's rose 3bps to 1.66% . The UK's rose 8bps to 4.34%. And Germany's rose 10bps to 3.69%. Editor: competition for scarce investment dollars, stocks or bonds?

That's the problem with deflation -- everything drops in value, so the only way one can profit from it is going short. All you can really do is put your money into short-term bonds and wait it out. Of course, if everyone does that, short-term rates go to zero, and output shrinks as people reduce consumption -- which is exactly...

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