Insights

Wall Streets Wild Ride

The week saw gold spike and drop.  Fed Chairman Ben Bernanke testified before the Senate Banking Committee trying to get a second stint as the man with the hot hand on interest rates.  While previous weeks saw Fed Presidents declare low interest rates as far as the eye could see, someone forgot to tell Philadelphia Federal Reserve President Charles Plosser what the game plan was, as he started calling for a hike in rates sooner than what the rest of the eco-birds were singing.  This breaking of ranks was foreshadowing it seems, as the Friday Unemployment number sent the market into a whole new phase of guessing and trading.

On Monday the market had a hangover from the previous Friday.  The previous Friday, Dubai World had come forth with news that they were in trouble with their $59 billion of debt.  On the day after Thanksgiving, a day that statistically has a strong upward bias, the market plunged.  On Monday, the market bounced back slightly (DJIA +35).  The news de jour was about the Black Friday shopping results and tracking how Cyber Monday was doing with the online purchases for the holiday season.  Who says the internet is a boon to information, as the confusion levied by various sites reporting different result about Black Friday brought nothing but contradictions as the results reported ranged from up 0.5 percent to down 8 percent.  It would have been worse if all the sites were in agreement that sales were lower or dismal so, averaging out the noise, it seems that Black Friday was a success for the current state of affairs.  With 10.2% of the country (17.5% unofficially) out of work, holding steady is a victory.

Tuesday brought life back into the Bulls, as gold traded new all time highs and the DJIA jumped 127 points.  Last year, the market watched problems with debt ricochet from one firm to another as the problem grew to historic proportions and caused the second greatest meltdown in financial history.  The $59 billion number was large enough to raise concern that this problem may domino out and cause a much larger crisis.  With reassurances from governmental entities and a few oil rich sheiks, by Tuesday the market players had decided the problem was contained and the losses from the previous Friday were erased.  A massive media deal was struck as NBC Universal left the house of General Electric Co. (NYSE: GE) and became the crown jewel of the Comcast (NSDQ: CMCSA) media empire.

Tuesday and Wednesday had one important thing in common – new all time trading highs for gold.  Talking heads, economists, hedge fund managers, government officials and Luke Skywalker were on CNBC talking about gold.  Was inflation driving the shiny yellow metal?  Was it a flight to safety trade?  Was it the declining dollar?  A lot of this chatter was politically motivated as the right wanted to blame the left for killing the dollar and stoking future inflation.  The problem with this, was that so much wealth was destroyed by the meltdown, and more importantly, the reaction to the meltdown, that inflation is in a coma at this time.  This latest calamity originated in the debt markets and with the banks.  The banks are struggling for survival and most importantly, for a stronger capital base.  Credit cards, lines of credit, HELOC’s – everything is being cut.  This massive drawback in available credit is more than holding back the waterfall of dollars Helicopter Ben has been dropping into the system.  The net-net effect is a lot more U.S. debt, but the money supply and velocity of money is not stoking the inflation monster.

Traditionally gold is a predictor of future inflation.  In a weird manner, gold is fulfilling its role but at the macro level.  While inflation may be the result of all the fiat currencies worldwide governments have flooded the markets with, the driving factor for gold is the governments themselves.  Central banks are now buyers.  These buyers don’t buy ounces, they buy tons at a time.  With the U.S. having been such a large exporter of dollars for years now, every government and their brother has a huge foreign reserve of dollars.  These dollar holders are trying to diversify into gold.  And this diversification, even at a small level, is driving the gold market higher.

So on Monday the market nudged upwards, on Tuesday it rallied, Wednesday stocks stood still and on Thursday the DJIA dropped 86 points.  The first four days saw the stock market stay near 2009 highs while the gold market climbed each day.  Wednesday gold broke $1,200 an ounce and Thursday gold stayed at these all time highs.

Friday started with a bang.  Unemployment dropped to 10% from 10.2% and futures ripped in the pre-market.  Previous months employment reports were revised up (less jobs lost) as we got the best jobs report we have had in over a year.  Jobs were still being lost, but it suddenly seemed that the bottom was in.  The dollar ripped higher, gold collapsed and the dollar short carry trade cowboys were now running to cover.  The market took off early but by mid morning had collapsed and was back to where it started.  The only thing that kept its trend was that gold was getting hit, and hit hard.

On Friday gold was down as much as $70 an ounce.  NY Spot Gold finished the day down $46 an ounce and the Dow Jones Industrial Average managed a 23 point gain.  This small gain was a victory as many had thought the short dollar carry trade cowboys were long the stock market.  When the dollar ripped higher and the shorts ran to cover, they would have to sell stocks.  It seems they only had to sell gold.

Net-net, the stock market did not move much this week.  Net-net, gold lost $20 an ounce.  This is not a lot of net-net movement, but it sure was a wild ride.