Continental Capital Advisors, LLC August 6, 2010

Similarities to 2008

Investors and market strategists are excited about the rallies in equities and economically sensitive
commodities, but the declines in gold and Treasury yields are likely warning of deflation.
Coincidentally, a similar scenario existed in July 2008 when investors embraced equities even
though a stock market crash was directly ahead.
In July 2008, a Lehman Brothers report about Fannie Mae and Freddie Mac contributed to an equity
market panic (link), but that panic turned into a short-covering rally that lasted through the beginning
of August 2008. During that rally, investors embraced equities because it was believed that Hank
Paulson’s “bazooka” (link) and other government action would protect the economy and financial
markets. However, gold and 10-year Treasury yields did not confirm the rally in equities; rather,
they signaled that liquidity was tightening and that financial markets were under significant stress
(Figure 1).
Figure 1. 2H08 Relative Values of Gold, S&P 500 and 10-Year Treasury Yield

120%

110%

100%

90%

80%

70%

60%

50%

40%
08

08

08

08
8

8
8
08

08

/0

/0
/0

/0

/0

/0

/0

/0
9/
1/

8/

6/

0/
1/
15

29

12

26

23

/7

/4

/2
/2

/1

/1

/3
7/

9/

10

11

12
7/

7/

8/

8/

9/

10

11

12

12

Gold SPY 10 YR yield

Source: Yahoo! Finance, Continental Capital Advisors

In hindsight, the market’s crash in the fall of 2008 seems as though it should have been expected, yet
equity investors completely ignored the deflationary signals that existed during the preceding
summer. In a repeat of 2008, gold and Treasury yields have recently declined as equities rose
(Figure 2). We think investors again are ignoring obvious deflationary signals because they are
hoping that future moves by the Federal Reserve will bolster asset markets.

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Continental Capital Advisors, LLC August 6, 2010

Figure 2. Relative Values of Gold, S&P 500 and 10-Year Treasury Yield Since June 15, 2010

105%

100%

95%

90%

85%

80%
10
10

10

10

10

10

10
/

6/

/
15

22

29

13

20

27
7/
6/

6/

6/

7/

7/

7/
GLD SPY 10 YR yield

Source: Yahoo! Finance, Continental Capital Advisors

Economic statistics are significantly weaker than they were in July 2008 even though the
government has spent trillions and the Federal Reserve has already cut interest rates to 0% as well as
bought over a trillion dollars worth of assets. Additionally, the 10-year Treasury yield below 3%
and gold’s decline indicates deflation and liquidity strains. Consequently, the stock market today
poses as great of a risk as it did during the summer of 2008.

Daniel Aaronson – daaronson@continentalca.com

Lee Markowitz, CFA – lmarkowitz@continentalca.com
http://www.continentalca.com

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text
should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their
broker and personal financial advisors before engaging in any trading activities. Certain statements included herein
may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the above mentioned companies, and / or industry results, to be
materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Any action taken as a result of reading this is solely the responsibility of the reader.

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