Dave's Daily

By Dave Fry, founder and publisher of ETF Digest and author of the best-selling book Create Your Own ETF Hedge Fund.

March 25, 2010

I FELT A GREAT DISTURBANCE IN THE FORCE

There truly are odd things going on which argue for caution. First, we have serious troubles in bond markets with auction results and continuing supply issues. The global sovereign debt issues are particularly burdensome and troubling in developed countries from the U.S. to Europe. Couple this with a Bernanke comment that interest rates need to remain low but then added a note not lost on bond vigilantes.  When asked about the balance sheet of the Fed he stated that there was $2.3 trillion (yes with a "T") in balance sheet items and wants to reduce it to a mere $1 trillion. As stunning as both figures are, this is just toxic waste carried at what cost? Par? If the Fed wanted to reduce these amounts then they could just be honest and mark them to market and achieve the same result since who would buy this junk at face value. 

Next, the current dollar rally doesn't generally bode well for U.S. stock prices as exports are made more difficult. Further, if the Chinese were to revalue the yuan higher that would be inflationary for U.S. consumers. Both the yen and euro are breaking down against Uncle Buck. 

Meanwhile unemployment remains high and officials predict that will continue. Housing data isn't doing anything to help either.

Investors today cheered Best Buy's results and were pleased with a misleading Jobless Claims number that showed a decrease; however, the Department of Labor changed the methodology. Had the alteration not happened, the number would have risen slightly rather than fallen per the headline. Nevertheless, markets rallied strongly throughout the day only to give it all back no doubt due to some of the issues cited above and ongoing overbought conditions.

Volume increased today on tremendous late day distribution while breadth was negative.

Continue to Major U.S. Market Indexes

Continue to U.S. Market Sectors, Selective Stocks & Bonds

Continue to Currency & Commodity Markets

Continue to Overseas and Emerging Markets

Continue to Concluding Remarks

There's a sense out there something's wrong. It's the same feeling many had before the major market drop in 2007. Then it was the housing bubble and the unknown quantity of derivative instruments that were about to implode.   Today it seems markets are driven primarily by trading desks with free taxpayer money. And, it just seems another Ponzi scheme now born of massive debt. Will it unravel and to what extent? Yes, it's spooky and there's a disturbance in the Force.

Let's remember, we're approaching the end of the month and quarter. Bonuses are on the line for portfolio managers. They'll do what they can to protect those.

Today the SEC issued an announcement that they're conducting a review of derivative use by leveraged ETFs specifically. Further, they stated they'll be restricting release of issues currently in registration until their review is complete.  The leveraged ETF sector has been the low hanging fruit for regulators to mess with as they flex their muscle. ProShares and Direxion currently dominate this sector. One effect might just well be that this "review" will keep competitors out and allow them to dominate.  Then, of course, it go the other way as they decide to restrict or void current issuer practices of utilizing derivatives in their product management.

Not to be left out, the CFTC is engaged in another restrictive attempt regarding position limits in metals. Traders and sponsors don't like it one bit and this article gives you a sense of the tone and issues.  Position limits have also been an issue for ETFs, previously exempt, for CFTC attention to reimpose them for grains and energy.  This too has been difficult for Deutsche Bank with ETFs linked to those sectors. 

All of these inquiries are like "messin' with Sasquatch" and are disruptive to innocent investors in my opinion. 

Let's see what happens and may the Force be with you. You can follow our pithy comments on twitter and become a fan of ETF Digest on facebook.

 

Disclaimer:  Among other issues the ETF Digest maintains positions in: RSP, IWM, MDY, VTI, QQQQ, XLY, XLI, XLF, IYR, IGV, UUP, EWC and EPI.

 

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com .

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