Money is scared now. Nobody seems to want to take any risk at this moment. Stock market plunged the past week after the Fed was not doing anything to stimulate the economy.
What is Operation Twist about?
The Fed announced that they are going to lower long term interest rates by selling shorter-term bonds and buying longer-term bond. The Operation will require US$400 bn to transact. The US$400 bn will not be printed but collected through the sale of bonds expiring within the next few years. And the US$400 bn will be used to purchased long-term bonds that last 6 to 30 years. Hence, there will not be new money circulating in the economy. In most investors/traders’ view, this is bad news and the once QE stimulated stock market can no longer sustain the bull run.
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Following the 2-day FOMC meeting with the disappointing announcement, stock market plunged the next few days. We saw STI broke below 2700 support, HSI dropped below 18,000, Dow below 11,000 and S&P 500 below 1,500. My take is to sell the stocks and buy them back when they are much cheaper. I have sold all my stocks and have gone short on a few Hong Kong counters, including Hang Seng Index.
Given the Euro Zone crisis, the Euro currency took a beating as more investment flee the troubled region. Who knows who will default next. Even the big brothers (France and Germany) in Europe were not spared of the bloodbath. DAX and CAC 40 fell in tandem. The devaluing of EUR at a fast pace shows that money is moving out of the place fast. EUR drops because people are selling European assets, converting EUR to other currencies to buy assets from another countries.
To my surprise, commodities also tumbled. Silver took a 15% drop on 23 Sep 11. Other commodities like gold and copper fell an 5% on a single day too. This shows 2 things: 1) expecting a slowing economy and manufacturing, and hence a low demand for commodities. Simply, people are expecting a deflation. 2) money is scared. Everyone has no appetite for risk anymore.
Where is the money going?
So where is the money going? The money is going to US treasuries – the perceived safe haven, the risk-free asset as defined by the financial textbooks. Another proof that money is going to US treasuries is that USD has strengthened across the board for the past few days. I see USD/SGD went up to 1.30 in 2 days. With the low-interest rates, US bond prices have already been going up for a long time. Especially when Ben Bernanke pledged to keep interest rate low for the next few years. And the new demand for bonds would push interest rate even lower. With the inverse relationship between bond price and interest rate, it is natural that bond price will skyrocket in a low interest rate environment.
What would I do now?
1) I would look for opportunities to short stocks. Now is not a good time as most stocks have gone down. Wait for rebounds and short them on the way back down again.
2) Sell my silver holdings. Market has proved money is scared.
3) I would also look for opportunities to short EUR/USD, given the bad news in Europe and the rise in demand for USD to buy US bonds.
These are not investment advice. I am giving my thoughts on the market and sharing what I am likely to do.