June 28, 2010 – A Grim Week for the “V” Crowd

Featured Trades: (‘V’ SHAPED RECOVERY), (YCS)
Proshares Ultra Short Yen ETF


1) A Grim Week for the ‘V’ Crowd. Even the most optimistic permabulls have to be rethinking their scenario after looking at writing on the wall that is so obvious, they can see it with their own blinkered, tunnel visioned eyes. First, the nonfarm payroll delivered a paltry 41,000 private jobs (click here for the details at ‘Where’s the Beef?’ ). Then, new home sales came in at a withering 300,000 (click here for more depth ), virtually assuring a double dip in housing. The 30 year conventional mortgage interest rate plunged to an all time low of 4.69%, driven by decade lows for the ten year Treasury bond at 3.09%. The 2% handle now seems just over the horizon. The final kick in the teeth came with a Q1 GDP that was revised down from 3% to 2.7%. This is all consistent with my long term view that we have permanently downsized from a long term growth rate of 3.9% to 2%-2.5%, and that the stock market hasn’t figured this out yet (click here for the ‘square root’ shaped recovery ). If the financial markets come to accept this view, the outlook for assets of any description does not look good. My ‘summer rally’ only managed to eke out a parsimonious 89 points in the S&P 500, falling 11 points short of my own modest 1140 target. The ‘right shoulder’ risk for the market now looms large (click here for ‘Bring on the Right shoulder), and if it is well and truly in, we are looking at pullbacks to 1,040, and then 950. That great benchmark for global risk taking, the Euro/yen cross, shows there is something rotten in Denmark. Proof this is at hand can be found in my ¥90-¥95 range for the yen, which just got sent to the recycling bin. I managed to pull out a fistful of day trades from the short side, before the break out delivered a haymaker right between my eyes, wiping out a third of my profits. That’s the way the world works sometimes. And thank you for the many emails from readers who successfully talked me off the Golden Gate Bridge.

Euro Index/Japanese Yen