Correlation Trade Breaking? Dollar, Commodity, Stock, Bond (UUP, GLD, USO, TBT)

Calling the markets fast to react has become the understatement of the year.  Friday felt like a shift in sentiment was really taking hold with bond yields rising, commodities falling, and stocks falling.  Now there is yet another reversal taking place via a breakdown of the tick-for-tick inverse correlation between the U.S. dollar and stocks and commodities.  Maybe part of the fear is Ireland, maybe not.  The reality is the market correlations may be breaking apart and many of these may start to act with a mind of their own.  PowerShares DB US Dollar Index Bullish (NYSE: UUP) is up 0.57% at $22.74, SPDR Gold Shares (NYSE: GLD) is up 0.13% at $133.86 and United States Oil Fund (NYSE: USO) is up 0.55% at $36.67.  To show how much long-bond buyers are having a bet against bonds, the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) is up 1.24% at $37.28.

Much of the reactions seen in the last 10 days or so is in reaction and re-reactions to the endless efforts of QE2.  The new form of quantitative easing is not going well.  the intent with printing money was to “buy down intermediate and longer-dated Treasury yields.”  That has not been seen as the focus is on more short-term instruments.

The yield on the Treasury 30-Year long bond was under 3.70% at the end of September and it rose to 4.00% at the end of October.  Now it sits at 4.31%.  As far as the 10-Year Treasury Note, right before the end of September those yields were just under 2.50%.  Yields were higher above 2.60% at the end of October and now they sit above 2.80%.

Ben Bernanke and friends at the Federal Reserve wanted to reflate by getting closer to a target inflation rate of 2.0% rather than almost no price inflation at all.  Printing money and temporarily buying down intermediate and longer-term bond yields is something that will have many unintended consequences.  We’d say this about manufactured inflation… “Be careful what you wish for.  You will get it, and then some…”

As far as gold or influencing other commodities and influencing currencies and equities, this is sometimes true and sometimes false.  During the peak oilboom in 2008, gold was flirting with $1000 and was generally in a $800 to $100 range before and after the oil bubble burst.  At the time, oil was peaking around the $140 mark depending upon which markets were being eyed at the time.

JON C.  OGG