By Surly Trader
Sell in May and Stay Away…
Boring Old Rehashes
I brought up silver yesterday because it has been a hot topic and it seems that it has topped out. I made a reference to the silver/gold ratio showing that it was less than half the level it hit in 1980, but in reality I have felt silver has been overpriced for a while. I have had multiple very good calls on this blog, but I have never rehashed them for fear that I would portray myself as a pompous prophet…which I am not. The funny thing is that I receive emails about my posts saying “the three days after you posted that article saying that volatility will increase, it actually decreased….<you’re an idiot!!!>” Well, volatility has increased and we will see where it goes, but I hate the fact that everyone is looking for daily calls….which are absolutely impossible. Going back to our current topic of Silver – on March 24th when Silver was at $37 I stated:
“I will not be participating in any of the upside in silver above $34 per ounce, but I feel just fine about this. I always believe that if something looks too good to be true it usually is and that it is better to get out before the top then to the last person buying. At this level it almost seems certain that silver will at least test the $50 barrier set over 30 years ago. I will be one of the people looking for a retracement. Yes, fiat currencies are a sham….but nothing ever occurs in a straight line.”
Silver hit its intraday high of 49.79 on April 24, 2011. Silver had its closing high of $49.45 on January 18, 1980. So far it appears as if silver is playing out as expected:
As a second point I will point to an article back in July of 2010 when I stated:
“No, I do not think the economy is great or that our recovery is “V-Shaped”, but I am also not socking away gold bars and guns in my basement. A few facts that I think warrant consideration:
- The S&P 500 has a dividend yield of 2.07%, which is 29bps greater than a 5 year treasury and 91 bps less than a 10 year treasury
- 7-10 year investment grade corporate bonds have a yield to worst of 4.66%
- Most compelling of all – the top 250 dividend paying stocks of the S&P 500 (forward) yield the same as a 10 year treasury
You still want to buy a treasury?
Now, unless sales drop off a cliff, I do not understand how cash heavy corporations will dramatically cut dividends. In order for sales to really plummet, unemployment would have to go much higher. The unemployment situation is ugly, but it does not seem to be getting worse. On top of that, refinancing is spiking which should put more dollars into consumer pockets.
I also saw an amusing post that said to get ready for Armageddon because the consensus estimate for earnings is $89 and they expect $69. Hold on a second, at a level of 1060, do we not still get an earnings yield of 6.5% versus a 10 year corporate bond yield of 4.66%?
Lastly, let me jump back to my original article of “Expect the Unexpected”. It turns out that I called an upward breakout of the dollar back in December 2009. Now, I am almost ready to call the dollar downside breakout as the Euro has stabilized and the carry trades are back on. Trade du jour – borrow in the cheap currencies and plow the money back into risky assets.”
Since that post, the S&P 500 is up 28% and the dollar has declined about 13%.
New Thoughts for the Interested
If you look at a chart of the S&P it is not very interesting. What is interesting is found in the volatility market, the treasury market, and the dollar versus other fiat currencies.
The S&P has seen a very mild decline since its peak of 1363.61 on April 29th, but we have seen a fairly strong rebound in the VIX since its low. In addition, the Credit Suisse Fear Barometer has remained in ultra-high +25 territory since the beginning of the year:
This is perhaps what scares me the most. Despite the fact that the Federal Reserve will end QE2 and stop its purchase of treasury securities at the end of June, the treasury market has rallied as of late. This either means that the Fed is putting in one last gasp of buying frenzy into the treasury market, or foreign and domestic buyers would prefer to own treasuries rather than more “risky” assets. Why would I ever think that a 3.25% yield on a 10 year treasury was a good deal when the biggest buyer of treasuries (the Fed) is leaving the market?
What exactly am I missing with the PIGS? Last May we saw a tremendous rise in US equity market volatility due to somewhat high credit risk premiums being placed on Greece, Portugal and Spain. Today we are seeing record high credit default swap levels (default probabilities) on all of the PIGS yet lows on US volatility and highs on the Euro versus the Dollar!
Despite the fact that the smaller Eurozone countries are facing their toughest financial conditions, the Euro currency is making highs versus the dollar… Is this Germany’s Euro or is it the Eurozone’s Euro?
In addition to these three interesting markets, we have a recent strengthening in the dollar and a recent strengthening in the Yen. None of these market facts provide me with a lot of “risk-on” trade comfort.