Opening Position
June 2011
Gold, silver, and oil — what a trio! They just keep chugging along, but I’m not sure why. Investors flock to the precious metals because they feel insecure about equities. But we’re not seeing that weakness reflected in equities, not yet anyway. And what about the rise in oil prices? Well, that started after the Libyan crisis, but why prices continue to rise is a mystery. Clearly, it’s not because of any decrease in the supply of oil; there’s plenty of it. So it is a little difficult to make any sense of why the markets are behaving the way they are. They just seem out of whack and there are too many question marks. I don’t know about you, but that makes me jittery.
As far as equities are concerned, aside from some hiccups such as the recent downgrade of US government debt by Standard & Poor’s, they seem to be continuing to move higher and breaking to new highs. All this action is going on in the midst of negative economic news. Although the performance of the financial markets is supposed to be a leading indicator of economic fundamentals, to me it seems as if the rate at which the markets are rising is just too fast. This doesn’t help to explain why the markets are behaving so strangely. Maybe all the liquidity the government is flooding into the market is leading us to believe that the markets are healthy.
Even though we have seen slight improvements in fundamentals such as employment numbers and earnings, I hardly think that justifies the rise in the markets. Come to think of it, the euphoria we are seeing in the markets of early 2011 seems to be eerily similar to the type of market we experienced in 2007. That’s enough to convince me to sell everything I own and move to cash — but why should I, if the going is still good? It’s a mystery.
The best thing to do in such a market is to take each day at a time. This is not the time to try to make any forecasts. Follow the masses while the going is good, but remember that in the financial markets, sooner or later all good things come to an end. We’ve seen it before and some of us have been hurt by it. This time it could be worse than what we saw in 2008 to early 2009. Make risk management your top priority by placing stops and managing your positions wisely.
Jayanthi Gopalakrishnan, Editor