Archive for June 2, 2010

Where’s The Street-Wise Hercules To Fight The Rising Odds?

Equities skyrocketed today, rallying 2.6% as for a single day at least the depressing moorings of reality were loosened. Or, perhaps, merly ignored.

Economic data were positive but decidedly second-tier. Pending Home Sales exceeded estimates, but with the caveat that the expiring tax credit likely goosed sales. We will know more when we see how steep the fall-off is next month and can start to figure out how much of those pending sales were merely pulled forward by the credit. Car sales were also comparatively strong, but 11.64mm in total car sales is a far cry from what used to be considered a weak month (see Chart, source Bloomberg).

Total Car Sales - Today's level actually exceeded estimates.

I think the market was up partly because Warren Buffett was on TV. I think that for some reason, when a legendary buy-and-hold investor appears on television, it reminds people that buying and holding can work (or so the legend goes). Of course, Mr. Buffett bought extremely cheap companies according to Graham and Dodd principles, most of which have been long forgotten by the mo-mo crowd, but I still think that psychologically it helps.

But I think the real reason equities were up is sneakier. Everyone knows that the Payrolls number on Friday is going to show a huge increase in jobs due to Census hiring. Since this is widely known, in theory it should not have a big impact on the market. A lot of investors, though, figure that they’re smarter than all those other investors and so they’re getting long (or covering shorts) with the intention to sell into the rally. At the very least, we know the talking heads on CNBC will be chirping all day about how great the economy is…and who wants to be in the way of that? We don’t see this as often in equities, but the bond market from time to time will trade up or down pretty hard the day before Payrolls based on perceptions of where the number will come, so this isn’t an unprecedented event.

Such clever stratagems, however, have a way of failing. If stocks rally again on Thursday, it may provide a lower-risk point at which to short stocks before the data because, after all, the higher the market goes, the easier it will be for the actual data to disappoint.


More Unsettled Geopolitics

The minor clash between lightly-armed Israeli soldiers and lightly-armed “peace missionaries” when the latter tried to run the naval blockade of Gaza has generated quite a bit of heat (and surely, more so than light). What worries me is that although this is a minor skirmish at best, and may be a simple question of peaceniks daring the military to respond (remember the “human shields” who Iraq welcomed to position themselves at presumed targets leading up to the first Iraq War?) or something more premeditated, right now the US is aptly perceived as being leaderless and therefore any Israeli “provocation” could ignite a broader conflict. Another ship, which may or may not be escorted by Turkish warships, is apparently on the way to try and run the blockade in what certainly does not seem to be an effort to stand down and lessen tensions.

These are dangerous times. And this is why it is so important that the US be perceived as not only a superpower that can control geopolitics, but one that will, and can. It isn’t clear that financially right now we are easily able to do so, because so much money has gone to bail out the auto companies, banks, GSEs, delinquent mortgagees; for “general purposes”; and of course (although the amounts spent on actual war now seem quaint) for other military operations. But moreover, thanks to the multi-year effort of those who still regret that we didn’t lose in Viet Nam fast enough, it seem pretty clear that even if we can muster the ability to do so the party in power doesn’t have the will.

If that’s an incorrect and unfair assessment of the Administration, the important point is that it isn’t one columnist who holds that view but, evidently, a large part of the world. If the view is wrong, then it is rapidly becoming time to show decisively that it is wrong. Like the weak kid on the schoolyard, Obama needs to punch very hard the first time a punch is required – and perhaps convince our enemies that they would rather see the velvet glove than the iron fist. I am not terribly optimistic that the Nobel Peace Prize winner will be able to flex when flexing is required, but we may soon see.

Now, why do I comment on politics (about which I am probably even less qualified to comment than I am on economics)? It is relevant here because financial markets and politics are intricately intertwined. An environment where multinational corporations are the rule rather than the exception and where many investors hold investments in multiple currencies is one in which the center must be strong. We have already seen the effect on European institutions of a weakening of the center of the EU. A significant weakening of US hegemony, while philosophically welcomed by many (including many in the US), has terrible repercussions for investing. Increased volatility, not to mention the lower prices associated with securities whose outcomes are less certain – from Treasuries to corporate equity – is not something that investors want to see more of.


Now, stocks are looking and feeling (and smelling) a little better today than yesterday, but consolidation at these levels isn’t very soothing unless prices manage to get up and out of this zone soon. Volume is not abating – if it were, then I would tend to think that the lower market level was serving as a price concession to let nervous holders out; in that case, after volume declined sufficiently we might read into it an exhaustion of selling pressure. But that doesn’t seem to be happening, very rapidly anyway. Volumes are still quite a bit stronger than has been the norm so far in 2010. (That being said, with the prevalence of high-frequency trading it is harder to read as much into the volume statistics as we used to). The same can be said of bonds; the 10y note remains at the low level of 3.34% and the 10y futures contract fell 9.5/32nds today. Today’s “upward volatility” in equities might seem like a good thing, but this will only end up being the case if it is followed by further gains in fairly short order. I still believe that a deeper retrenchment is due.

Thursday’s economic release calendar is busy, but it is mostly noise before Employment on Friday. Since the Employment report itself will be tainted with a lot of unrelated noise, we probably ought to pay more attention to Thursday’s data but I doubt it will resolve anything. ADP (Consensus: +70k compared to +32k last month) is still showing feeble organic jobs growth, and anything less than the +70k forecast should be considered very bad news. After all, if you go out and hire hundreds of thousands of Census workers, you also generate demand ancillary to those direct hires! Also due out are final revisions to Q1 Non-Farm Productivity and Unit Labor Costs, which is a non-event, Initial Claims (Consensus: 453k from 460k as economists continue to look for improvement), Factory Orders (Consensus: +1.8% after +1.3%), the ISM Non-Manufacturing Index (Consensus: 55.6 from 55.4), and the ICSC chain store sales report.

It will be enough to keep us busy, even if nothing more happens in the Middle East or on the Continent.

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