Thursday, July 26, 2007

Late night thoughts, 7/26/07

It’s late so I’m not going to dwell too much on the sell-off today. I’ll try to be brief and to the point.

I expected earnings to take a hit in Q3 so the string of Q2 downside surprises was somewhat of a surprise for me. For now, I’m still treating this as a controlled descent even though I have always expected housing weakness to “spill over”. There is a tendency to think the market will keep falling after a big drop like today but things rarely move in a straight line. While I’m not a buy-and-holder, I’ll wait for a downtrend to be convincingly established before changing my long stance.

Precious metals

The XAU put/call ratio made a new high on Wednesday. I have discussed this ratio previously so I won’t belabor the background here. Let’s take a look at the three highest spikes, viz:

  • 6/12/06 XAU put/call ratio = 6.7, 6/13/06 XAU intraday low = 119.11, 7/12/06 XAU intraday high = 150.70, a gain of 26.5%
  • 6/26/07 XAU put/call ratio = 5.3, 6/27/07 XAU intraday low = 130.83, 7/20/07 XAU intraday high = 159.14, a gain of 21.6%
  • 7/25/07 XAU put/call ratio = 7.3, 7/26/07 XAU intraday low = 144.50, …

To summarize, on the first two occasions, a significant bottom in XAU was made one day after and XAU gained 20+% within 1 month. What this most recent spike foretells remains to be seen.

Disclosure: I picked up some GDX calls today.

New high in Shanghai

Unbeknownest to many, Shanghai (SSEC) made a new high Wednesday night. Not too long ago just about everyone was worried about a Shanghai bust taking out the rest of the global markets. Well, I was never on that bandwagon. Recently, there has been an increase of IPO activity in China which is the chief mechanism by which mal-investments occur. However, my main argument was that time, or the persistence of price movements rather than its magnitude, contributes more to mass psychology in a bubble than anything else. Given that SSEC made a significant bottom in late 2005, this “bubble” is still in its early stage yet.

CAF (Morgan Stanley China A Share Fund) is the easiest way that I know to participate in the A shares market. It’s now sporting a 17% discount as US investors have been inundated with bubble talk. I currently have a small position in CAF in addition to some FXI.

“There’s a bull market somewhere”
So the saying goes. Today that somewhere is agricultural commodities (besides treasuries, that's too obvious). On a Dow-down-300-pts day, they massively outperformed. Just check out DBA, POT, TNH, and of cause, this impressive break out by BG: