In his most recent Wellington Letter (Aug 31, 2009) Bert Dohmen, of Dohmen Capital Research Institute, warns that the current stock market rally is done and money flows will start moving from stocks to safety. Note that when we talk rally here, we are not just talking about the US stock market rally, but the globaly rally, including China and other emerging markets.
“Our work strongly suggests that the rally is now very close to being done. The risk/reward of owning stocks right now is unfavorable”
Mr. Dohmen continues:
With bullish sentiment at an extreme again, money flow can only go in one direction, from stocks to safety. And that’s already happening in china. The emerging markets will be very vulnerable as well.
Mr. Dohmen cites several reasons, including the extreme bullishness trend above. Here are some other factors at play, pointed out in the Wellington Letter:
- Chinese government is withdrawing stimulus and the speculators are rushing to the exits.
- The Chinese market has been more speculative and more overvalued this year than at the top in 2007
- There will be a global surplus of commodities once China stops buying.
- Chinese stock market is up 80% while corporate profits in China are down 30%. (dohmen asks, “Is that a bubble?”)
- Trade is plunging at depressionary speeds
- US Credit market debt is 375% of GDP
Bert Dohmen does some excellent analysis on global economies and financial markets. His Wellington Letter is publised twice a month and delivered in online format.
You can try it out for three months or you can subscribe for longer if interested by clicking here…
Just a side comment —
For those that try to follow capital flows, the 10yr and 30yr US Treasury bond yields have dropped 10%+ in the last few weeks while the US stock market has slowly inched up (wierd).
While China was collapsing, bonds have been rising… seems that speculators pulling out of China are seeking safety in US treasuries (kind of like during last year’s collapse!).
Could be nothing, could be something.
10 yr Tbond chart, click here
Anybody read Dohmen, any opinions on him, good or bad?
For every economist who says the rally is over there is one who says the DOW is going to the moon and beyond. You can overanalyze these things if you’re not careful. Saying that China will cause a global glut of commodities is a pretty big statement to make, but how long will that last? How much will it really affect the market? I enjoy reading this stuff because it gets me thinking about things, but I don’t take it too seriously. I believe Jim Rogers when he says that commodities will be in a bull market until about the year 2016. Of course there will be ups and downs, but if you stick to one investment philosophy, you will look at dips as buying opportunities and not as a reason to pull everything out.
well, i posted a big ‘ol long response to Bob and AS, but something screwed up with WordPress at some point during the day and nuked all the comments. I pulled yall’s from my email and reposted them, but mine is toast. Gotta run to Cub Scouts…
So, to keep it simple, this is a good interview on McAlvany Weekly Commentary with Bert Dohmen from June 10. I like the guy. Seems solid to me:
http://www.mcalvany.com/podcast/?p=80
Huh…yeah, the T-bond vs. stock market thing is kinda weird…even I know that.
It seems to me that everyone I’ve been listening to recently (e.g., Schiff, Denninger, Mish,) all make valid points…but none of them really has me sold that they really have a grasp of what is happening/about to happen.
Schiff is still screaming about inflation, while Mish says the opposite. Well, as we’ve been over before, they both are right…depending what you are looking at.
Mish has really been hammering the deflation button over the last couple of days…
I wonder what Denninger would say right now about the bond yields…He’s been warning that those babies are going to rocket up for quite some time.
I’m pretty sure were overdue for some real fireworks, of one sort or another…
What to do…?
Well, for now, I guess I’ll “stick to my guns” – literally.
That’s all you can do Rick.
I read something over at Zero Hedge yesterday… forget who wrote it or on which post…
“Either the bond market is wrong, or the equities market is wrong” right now.
US 30Yr TBond dropped 3 basis point overnight, and it looks like the 2yr is down 9 basis points in 2 – 3 days. Money is moving into bonds, and I don’t think it is all monetization. There is some serious capital moving into the US right now. I am not holding long right now (except for gold… you can take my gold stocks from my cold dead hands!)  and am more inclined to say we have a decline coming… not necessarily a “crash” but a correction or solid drop.
I think the GDP numbers coming out next month may turn around whatever decline we experience right now… depends on how the public reacts of course, but the GDP numbers are probably going to look “positive” or “better than expected” so perhaps a correction and another move up??
oh who the hell knows… I got my shotgun and some spam, so who cares what SPY or Citi does today!?
Hmmm…gold jumped up $22 today…but the dollar seemed to hold relatively well.
Interesting. I’m not sure what that means in the big picture…but, interesting.
my guess is that the Chinese are running for safety… US Tbonds/bills are going nutz too…
This seems to be a typical flight to quality response to me.
US equities – not so much… but perhaps Shanghai is a leading indicator of a correction/collapse to come. off 25% since July? ouch… a move like that in the S&P would take us down to around 750… that would be pretty brutal.
The recent T-bond action astonishes me.
What the hell would make people rush to them for SAFETY?
Is the rest of the world’s economy really that screwed?
Are they really that much of a safe haven?
My Doom’s Day Gut Reaction is that it is, at least in part, the Fed…just another reason why they don’t want to get audited…
Is that remotely possible?
Rick, not only is is possible that the Fed is driving it, i would say it is probable!
But, it is quite a LARGE move in recent weeks, so my guess is that money is coming in from China or perhaps from investors in the US as well… Of course, I am speculating, but it seems plausible because of the recent hit China took.
Looks like people moved into gold and US Treasuries.
Last year Treasury yields on the 30yr were down near the 3.5% area as investors flocked to safety and delveraging happened.
From what I have read, historically, short-term maturity Treasuries have been one of the safest investments. Even in the great depression, with banks collapsing all over the place, the government always made it a point to pay the Bills.
Since we are not done with deleveraging yet, it seems to me that, at least in the short-term, any sort of collapse in global markets would be “good” for US Treasuries… but i think this will be short-lived and money flow out of them just as quickly.. Wouldn’t be surprised to see yield triple or quadruple over the next 0 – 5 years, especially if confidence in the public sector is lost ….