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Saturday, August 21, 2010

Market Thought... rules don't change

Rules are rules for a reason, rules do not change.

Bubbles are predicated because there is a mythical fascination that rules can be broken. Conspiracy theories aside, fundamentals matter.

While I view myself as a high frequency trader, with all the glory of being a momentum whore, I also read a shit load about what is going on in the world every day. And try to dig deep into subjects of interest (any everywhere I invest is a subject of interest). This deep knowledge is utilized to facilitate multi-day/week/month trades and high frequency trades.

For example, when oil was approaching 130-140 in 2008, there was a growing level of chatter that indicated the continuing rise in oil was not justified. A disconnect was building, and we started seeing investors justify the high price (and a continued rise in commodities in general) based on multi-year projections instead of the economic slow down we were seeing. A real demand once existed, but that 'real demand' got morphed into blind enthusiasm.

This disconnect is happening now in the 10yr - treasury. Others see this disconnect too, Doug Kass and Jeremy Siegel to name a few. Some of the chatter that I specifically remember is when bond bulls (ie Gary Shilling, at minute 17) indicate they are buying bonds for the asset appreciation value verse income.

Now, I am no expert in bonds, and as an investor I fully accept the fact that any investment vehicle will have asset appreciation or discounts, but bonds are specifically designed for income. (Although I know the size of the bond markets dwarf the equity markets, and asset appreciation trading takes place very frequently.) But asset appreciation of any investment vehicle must be predicated on a reason. I.E. A company has a high EPS growth rate, its valuation merits a higher multiple. Or bond yields go down when there is a deflation or deflationary threat.

When I look at the chart of the 10-yr treasury yield, and attempt to correlate the inflation numbers economic data is telling us, I scratch my head. I fully accept an aspect of our economy is in deflation (ie certain financial loans and labor costs, probably the biggest driver), but for the most part, almost every other day-to-day items are not. Throwing some common sense into the mix, let me say this, the 10-yr yield has entered crisis level yields. When I say crisis level, I say the world was literally on the brink of social chaos as the fabric that holds society together (ie the economy) received its largest ripping ever. Nothing was moving, nothing. I mean Mohamed El-Erian went on CNBC and told them that he told his wife to take out as much money from the ATM as she could!

So I ask, is the social fabric in the same kind of condition it was in 2008-2009?

There is a disconnect.

With respect to the market, I still very much believe in my 'think a little' post.

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