Friday's Musings

1. The stock market refuses to go down.   When the market is bullish, it goes up, and most bad news is discounted.  Gentle Readers, there is a huge huge amount of cash on the sidelines that is waiting to be invested.  Where is it going to go?  With six straight weeks of wins (and very likely seven after today), this is now the longest winning streak to start a calendar year since 1971.  Short term the market is way overextended.  Everyone (including me) is uncomfortable with this kind of move.  One thing we know, the market will correct at some time, but "when" is the question.  Review my last Sunday's blog.  What should we do?
1. Wait patiently in cash if not invested.  Cash is a decision, and an investor will always have lots of opportunity to invest.  Be comfortable is a terrific mindset to have.
2. Within this mindset is to keep a view toward technical analysis. What is riskier?  A market at the top? or a market that has corrected and value starts to appear in the best assets?  
3. President Obama's State of the Union was polarizing.  The divide between the parties is growing wider, and the non-conformation of the Secretary of Defense only widens the gap further. 
4. Watch the US Dollar Index (DXY).  When the dollar index is trending higher, that puts pressure on the overall US stock market (and stocks world-wide).  If it trends lower, the market usually continues to rise. (Please note:  This depends on the kind of market we are in.  With a strong bull-market that is relatively low in volatility, following the dollar provides insight. Let the VIX increase above 20, however, and the market and its interrelationships change.  For now, if the dollar index breaks below 79 that will provide a huge bullish catalyst, and much of that sideline cash will drive the market higher.  
5. Watch the long-end US Treasury Curve specifically the ten-year treasury bond (TNX) and the ten year note (TLT).  The Federal Reserve has been aggressively buying long dated treasury bonds as part of QE in order to keep interest rates lower.  Within the QE scenario, as bonds rise (interest yields down), it is positive for the stock market, as investors (long term traders) are looking for yield.  If ten-year yield breaks out above 2.1% that should be bullish in that money is flowing out of fixed income assets and rotating into equities. If ten-year yields fall back into 2.0%, then remain very patient. 
2. The dollar is appreciating this morning (DXY).  Since 2/1/13 the DXY is moving up strongly.  All the currencies (except the YEN) are moving down.   Germany's Bundesbank President Weidman said overnight that "one cannot say euro is seriously overvalued".  Draghi chimed in with "real euro exchange rates are around their long-term averages."  That provides verbal support for the Euro at this level. 
1. Why is the YEN going up?  There is no real reason except for the comments a few days ago from the finance minister and others in Japan that I reported several days ago.  
2. It is possible FOREX traders are covering the shorts as one can never tell what may come out of the G20 meetings now going on in Moscow.  As I reported, Russia in particular is harping on producing policy that would limit currency devaluation.
3. In the UK, January retail sales fell for the second consecutive month.  The media blamed it on the cold and snowy weather in January.  The outgoing Bank of England Gov. Mr. King was worried about inflation.  His replacement had better worry about the economy contracting than inflation accelerating.  
4. In Brazil... Yes Brazil is an important economy in the global market place.  The Real has been appreciating, which is surprising given their action on driving the Real lower.  The Real is pretty strong all of a sudden.  And then Brazilian Finance Minister Mantega said last night: "we will not allow for an over appreciation of the Real, and we won't tolerate abnormal fluctuations".  If you watch the currency markets, you eye and ear will become attuned to this kind of lip flapping.  Inflation is running way above targets in Brazil and has been for two years. Mantega also committed to fighting inflation last night.  [ http://www.bloomberg.com/news/2013-02-15/mantega-says-brazil-won-t-allow-currency-to-over-appreciate.html ] They will have a tough time weakening the Real this time if they continue to fight inflation. However, be aware that Mantega is signaling he is willing to weaken the currency in order to keep appreciation under control.  Currencies are interesting are they not?  
5. The Canadian dollar reached parity (briefly) with the US dollar yesterday.  The Bank of Canada would like to raise the interest rates to squash the housing appreciation in Toronto, but Alberta specifically and other provinces still need accommodative rates.  There is little (if any) reason to move up or down.  If Oil increases in price, so will the Canadian dollar. 
6. Sweden and Norway (specifically Norway) would love to raise rates.  However, how do they do that without their currency heading toward Pleides? That is a problem for them, but if you were Governor in that strong an economy, would you not do something to manage the housing appreciation and inflation?  
7. The Indian Rupe has fallen on difficult times again after a very strong run-up through last month.