Research Watch

As the Dow reaches new highs, there are lingering concerns the Fed could ruin the rally when it starts tightening. But when rates do rise, Dave Rosenberg argues markets will probably continue to climb with them. In fact, some are now arguing stocks are the new safe haven. That could be bad news for gold, which Goldman Sachs has named the worst investment of 2013, although Morgan Stanley says the reasons for owning the precious metal are evolving. Elsewhere, Apple is trading like a commodity, corporate toy orders show bullish signs, and the greater rotation may be out of investing altogether. On video, new footage from inside China’s ghost cities is unlike anything we’ve seen before.

Don’t fear a tighter Fed...

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“The number of times we actually had a bear market on our hands with the Fed easing and the economy expanding by any around is around zero. This is actually the most bullish quadrant. Even when the Fed is tightening policy, so long as the economy is not contracting (this is generally before the yield curve inverts), the natural tendency of the market is to grind higher. You heard that correctly, though the uptrend line is less notable than when the Fed is easing and the economy advancing. The worst times are the recessions, pure and simple, especially in those periods when the Fed is still draining liquidity with the pace of economic activity contracting. For the time being, it looks the green light is still on provided that Quadrant one still holds.” (Dave Rosenberg of Gluskin Sheff, March 3)

Is the Dow the new safe haven?...

“Gregg Gibbs, senior foreign-exchange strategist at global investment bank RBS, said the resilience of the Wall Street index in contrast to other asset classes makes it a fresh safe haven for investors. ‘We have been looking at the Dow as the new safe haven,’ Gibbs said... ‘When you look at the Dow and the US dollar compared with many emerging markets including China, the US offers the best economy with the best outlook globally,’ he said. … ‘Bond yields are at record lows and cash rates are at zero, so equities are now seen as the place to put your money, especially as central banks continue to provide quantitative easing measures,’ said Gibbs. ‘Furthermore, the Fed is striving for growth and will accept higher inflation so equities work as an inflation hedge,’ he added. Gold, the traditional safe haven, has in recent times defied its historic role as a hedge against inflation and bad times, with investors looking at other assets for safety. According to Gibbs: ‘This is partly due to the fact that gold is already very expensive [on a historical basis] and due to the broad-based strength of the US dollar against most currencies.’“ (CNBC, March 6)

There are five stocks behind the rally...

“Five blue-chip stocks have accounted for about one-third of the rally in the Dow Jones Industrial Average since the financial crisis. As the Dow more than doubled to its record high, International Business Machines, Caterpillar, 3M, Chevron and United Technologies were the biggest drivers among the average’s 30 components. The Dow is a price-weighted index, meaning the bigger the stock price, the larger the sway for a particular component. … IBM currently holds the biggest weighting in the Dow, making up about 11% of the index. The stock has risen 147% from the spring of 2009 and finished at $206.53 on Tuesday. That move alone contributed 941.77 points to the Dow’s 7,706.72-point rally since March 9, 2009, according to S&P Dow Jones Indices. The next closest contributor is Caterpillar, which added 507.56 points to the index. Chevron and 3M each accounted for more than 400 points apiece.” (Wall Street Journal, March 5)

Gold is the worst investment of 2013...

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(Goldman Sachs, March 5)

But the reasons for owning it are evolving...

“From 2001 to 2008, [Morgan Stanley’s chief metal strategist Peter Richardson] writes, gold went up because of:

1. a persistent increase in investment demand.
2. acceleration in producer de-hedging.
3. a decline in net official sector sales, and
4. a persistent failure on the part of the mining companies to respond to the incentive of a steadily rising price and materially lift production.

Then, from 2008 to 2012, gold was driven higher by investors’ waning confidence in the stability of the global financial system and an unprecedented monetary easing by central banks. In 2011, though, gold became tightly correlated with the trade-weighted US dollar. Richardson attributes this to slowly declining financial stress and less surprises on the central bank liquidity front as time progressed. … What happens next?

Morgan Stanley’s house view as espoused by Richardson is that ‘we are about to witness the third instalment of the Great Monetary Easing.’ … Richardson concludes, ‘In these circumstances, we believe that gold has demonstrated considerable technical strength, offers good value at current prices both as an entry level to the trading range between US$1,540/oz and US$1,800/oz and as an option on any remaining upside surprise above this range that might result from [extremely loose monetary policy set to hit Japan and the attempts of other countries to not let their currencies strengthen too much in the face of a weaker Japanese yen].” (Money Game, March 4)

Apple too, perhaps...

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“Mark Dow tweeted this great chart comparing Apple to the gold miners over the last year. Says Dow: ‘Not saying that $GDX (blue line) and $AAPL are similar behavioural phenomena...well, actually, I am.’ … While other stocks were massively correlated, moving in tandem, Apple was ripping higher, divorced from market gravity. But with the sun rising, and the crisis panic fading, markets have become less correlated. And suddenly there’s less demand for a unique asset that’s shown itself to be untethered from everything else. So just as there’s less need for gold in a world where there’s more optimism and less panic, so too is there less need to own Apple.” (Money Game, March 4)

The greater rotation might be out of investing entirely...

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Since 2004, interest in ‘stocks’ and ‘bonds’ has plunged by more than 50%. Despite a renaissance for bonds in 2008, and stocks in 2009, the ‘Great Rotation’ appears to be ‘out of investing’. Google Trends also shows that, as expected, ‘Bonds’ have been more popular than ‘Stocks’ since the crash - a development the Fed is so desperately trying to reverse, by imposing ever stricter central planning, ironically the reason why most have ‘just said no’ to an authoritarian, inefficient, and farcical policy instrument formerly known as the market.” (Zero Hedge, March 1)

But the ‘deal toy’ indicator just turned bullish...

“Deal toys are small, relatively inexpensive and typically Lucite, trophies that serve as a way to commemorate a firm’s noteworthy deals. A company may order 20 or more of them for the employees involved in the deal. As a result, they’re a pretty good gauge of deal activity. In Wall Street’s heyday, before the financial crisis, companies ordered ‘toys’ with abandon — not even worrying about how much they cost. During the financial crisis, the business dried up dramatically. And Wall Street remained rattled last year with the ‘fiscal cliff’ at the end of 2012, when tax increases and spending cuts were set to kick in. Now, with that crisis averted, business is starting to roar back. At GDN, a Manhattan-based deal-toy maker, orders doubled in the first two months of 2013 from the same period a year earlier, President and CEO Kim Russo said. GDN currently has orders for toys to commemorate six deals worth over a billion dollars each, ranging from $1.3 billion to more than $20 billion — large even by Wall Street standards.” (CNBC, March 5)

Video of the Week: Exploring China’s ghost cities...

You’ve seen photos of China’s deserted towns, but they are nothing compared to new video footage from 60 Minutes.

(60 Minutes, March 3)