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HomeDon’t Worry Be Happy
Posted by Larry Doyle on November 13th, 2009 11:40 AM |
Happy Friday!!
I have to admit, virtually every major story I review today would seem to indicate further challenges for the American economy. In the perverse world of the Uncle Sam economy circa 2009, those challenges seemingly do not present hurdles for our markets but rather greater comfort for those who would want to add to positions via the dollar carry trade. Is that bizarre? No, that’s the market. While many may not believe what the market is saying, please recall I always maintain the market is never right nor wrong, per se. It is merely the market.
What stories represent increasingly high hurdles on our domestic front?
1. The Federal Housing Administration, which now plays an ever larger role in our domestic housing market, is poised for a bailout by Uncle Sam. You didn’t actually believe the FHA leadership when it stated a mere few weeks ago that it would not need a bailout. Do not believe that man behind the curtain. Whether it is Freddie or Fannie, or now the FHA, the American taxpayer will most likely continue to pour multiple billions into the sinkholes of these three organizations. Let’s be honest. Our housing sector, to a very large extent, is nothing more than a social experiment.
Don’t worry, be happy!!
2. Our trade deficit unexpectedly widened. All other things being equal, that report would serve as a drag on our GDP, hit our greenback, likely push interest rates higher and equities lower. Discounting the actual economic reasons that impacted this increase in the trade deficit, the market is comforted by the fact that the dollar should remain under pressure based on this report. A lower dollar comforts the leveraged positions across wide swaths of our markets.
Don’t worry, be happy!!
3. The University of Michigan Consumer Confidence reading plummets to a devilish level of 66 from 70.6. The market was expecting a bounce in this report to as high as 72. Reason to worry? Holiday sales might be a problem?
Come on, it’s Friday, don’t be a downer.
Don’t worry, be happy!!
What a world.
LD
What Do CA, AZ, FL, IL, MI, NV, NJ, OR, RI, and WI Have in Common?
Posted by Larry Doyle on November 12th, 2009 2:25 PM |
No, these states are not holding a Powerball Lottery . . . although the states themselves could use the winnings.
These states, amongst others, are barreling toward economic disaster. Don’t take my word for it. None other than the Pew Center on the States produced a report entitled Beyond California: States in Fiscal Peril:
(High five to MC for bringing this to our attention)
California’s financial problems are in a league of their own. But the same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country. (more…)
“Nobody Has Ever Seen This Market”
Posted by Larry Doyle on November 12th, 2009 8:22 AM |
“I’ve seen this market before” is a very commonly used phrase by Wall Street professionals to compare and contrast different periods.
For example, when the Treasury yield curve is steepening or flattening, many market pros will project what will happen in different segments of the market based on discounting cash flows under the steepening or flattening scenario. Similarly, when credit spreads are in a widening or tightening trend, market pros will project how higher or lower rated investments will typically behave.
These projections are all based upon prior experience. The pros are utilizing a combination of market fundamentals along with investor sentiment to make forecasts. They will overlay their current forecasts against similar trends during prior cycles. Not that markets are ever perfectly symmetrical, but ‘having seen a market before’ is often a strong indicator of current and future price action.
Against this backdrop and given the challenging nature of the current market price action, I would challenge any market analyst or pundit who would utilize a similar approach today.
The simple fact is, ‘nobody has ever seen this market before.’ Why? Because this market has never transpired previously. Certainly, we have seen bull markets. We have seen low interest rate markets. We have seen accomodative Fed policy. We have seen bubbles. All that said, we have never seen a market in which global cross currents combined with ongoing fiscal stimulus have impacted markets to this extent.
In fact, I think one could make the case that the market is doing better as large parts of our domestic economy and the global economy are actually doing worse. While traditional schools of thought would view that correlation as perverse, the economic strains are compelling global governments to keep stimulus programs in place.
What is the result? A rallying market with increasing potential that the market develops into a blowoff. The irrationally positive nature of a blowoff is akin to a wholesale dumping of securities in a selloff.
Keep your head and stick to disciplined investing. Respect the price action, but do not get overly enamored with those analysts telling you what will happen . . . because ‘nobody has ever seen this market.’
LD
Dollar Carry Trade ‘Still’ Drives Global Equity Markets
Posted by Larry Doyle on November 9th, 2009 3:10 PM |
Has anything truly changed in our economy or markets over the last two months? Market analysts would attempt to gain credibility by overanalyzing each and every piece of data that comes along, but the very simple fact is that little has truly changed since I wrote “Dollar Carry Trade Drives Global Equity Markets” on September 16, 2009.
With the equity markets making new highs for the year, I am not so foolish as to ‘fight the Fed’ or ‘fight the tape’ while fully appreciating that the foundation of our markets and economy remain extremely fragile. In that spirit, what is driving the market ever higher? I resubmit my post mentioned above:
All aboard!!
As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’
I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar: (more…)
Neither a Buyer Nor Seller Be
Posted by Larry Doyle on November 6th, 2009 1:18 PM |
What does it all mean?
Observing the market’s muted reaction to the Unemployment Report this morning makes me think of a phrase not popular on Wall Street. That phrase, ‘neither a buyer nor seller be’ sends a mixed message bordering on indifference as to market activity.
Why are so many market participants not involved or less caring of the daily price action? I would put forth the following reasons:
1. Overriding concern with trying to get their own financial house in order.
2. A general level of disbelief in the integrity of certain market structures (for example, high frequency trading activities).
3. ‘Don’t fight the Fed’ meaning when the Federal Reserve is actively involved in the market, as they are now, it is never prudent to take the other side of the Fed’s trades.
4. Limited trust in the financial regulatory oversight of Wall Street.
5. Limited trust in the statistics being put forth from Washington. For example, questioning the integrity of the 640k figure of jobs saved or created by the Obama administration.
Add it all up and what is an individual to do?
Neither a buyer nor seller be….
What do you think?
LD
October 31, 2009 Market Review: Cinderella’s Ball?
Posted by Larry Doyle on October 31st, 2009 8:34 AM |
HAPPY HALLOWEEN!! Is the clock getting ready to strike twelve? Is it time to get home? Is the magical ball that has enchanted many market participants about to end? How so? As quantitative easing programs around the world end and global governments start to increase interest rates, will we experience a double dip in the global economy?
Or, are the Uncle Sam economy and numerous global economies blazing new trails and redefining the economic landscape?
As with most things economic and market related, the answers are never ‘crystal’ clear nor do they fit like a ‘slipper,’ but let’s do our best to read the October market moves and project our way forward.
ECONOMY
The U.S. economy came out of recession in the 3rd quarter with a positive 3.5% print. While that number surprised to the upside, please review my post “Grossly Distorted Product” or “Christmas in July” to get a pulse on just how weak the American consumer remains. Further confirmation of a subdued American consumer is reflected in the decidedly weak Consumer Confidence report highlighted in my post, “Jobs + Housing = Consumer Confidence.”
Around the globe, non-Japan Asia is generating some real growth. To wit, we have already seen Australia raise interest rates to stem fears of inflation. Who next raised rates? Norway. The U.K remains mired in a recession. Eastern Europe is struggling while Germany is leading the EU. If we know anything about Germany, they have little interest in any hints of inflation.
While there are pockets of strength around the globe, many economies – including the U.S. – remain challenged. What will continue to happen? International trade tensions as weak countries try to generate greater exports via weak currencies.
Let’s review market returns. (more…)
Goldman’s Hatzius v Morgan’s Kasman: “Let’s Get Ready to Rumble”
Posted by Larry Doyle on October 30th, 2009 11:20 AM |
I love a good debate. Much like a prize fight, a healthy debate can ebb and flow as those ‘in the ring’ bob and weave while trying to score points. I so enjoyed a debate highlighted by The Wall Street Journal between the chief economists from Goldman Sachs and JP Morgan that I highlighted it in the Newsworthy section of Sense on Cents. For those who don’t visit that section of my site, I am compelled to replay this debate here.
In the inimitable words of Michael Buffer, “let’s get ready to rumble” as Goldman, J.P. Morgan Economists Debate Shape of Recovery:
The recession might be over, but how goes the recovery?
We posed that question to two prominent Wall Street economists with two very different views of 2010. Bruce Kasman, chief economist at J.P. Morgan, sees the U.S. growing at about a 3.5% pace for most of next year. That appears optimistic compared to Jan Hatzius, chief economist at Goldman Sachs, who sees gross domestic product growth of 2% or so at the start of the year tapering off to just 1.5% by year-end.
The following is an edited transcript of their remarks during a recent conference call with The Wall Street Journal.
Looking ahead to 2010, what kind of recovery do you see? (more…)
“Grossly Distorted Product” or “Christmas in July”
Posted by Larry Doyle on October 30th, 2009 9:10 AM |
What is the real economy doing? While yesterday’s GDP printed a surprisingly strong 3.5%, are we to take that on face value? If we care to most effectively navigate the economic landscape, we should dig a little deeper.
A full 2.2% of the 3.5% rise was directly correlated to Uncle Sam’s support of the auto and residential construction sectors of the economy. Another .6% of the GDP was directly correlated to federal spending. Obviously, the Uncle Sam economy implies a large presence by that jolly old man. However, all that money Sam is pumping is nothing more than borrowing from future generations and pulling demand forward.
What would the economy have done on its own without the government support? Let’s listen to Christina Romer. Recall that Ms. Romer referenced last week that this quarter would provide the peak impact of benefits accruing from Uncle Sam’s economic stimulus. What does she say about this GDP report? The Wall Street Journal references Ms. Romer in writing, Economy Snaps Long Slump:
Without stimulus programs such as “cash for clunkers” and a first-time homebuyer’s credit, “real GDP would have risen little, if at all, this past quarter,” Christina Romer, president of the White House Council of Economic Advisers, said in a statement.
Why does Ms. Romer provide that sobering view of the economy? Very simply, if the American consumer represents 70% of the economy, then we should largely focus on that consumer. What did we learn about the consumer over the last quarter?
The Financial Times’ John Auther informs us in writing, Short View: GDP Grows, but Pain Remains:
Household disposable incomes actually fell during the quarter, by 3.4 per cent, but consumer spending rose, also by 3.4 per cent. This is not a pattern that can be sustained for long, and it is inconsistent with the need for US families to pay down their debts.
What does that disparity between income and spending represent? An unsustainable economic path. What else does it mean? The U.S. economy just had “Christmas in July.”
Did you get anything in your stocking?
LD
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If The Market Declined 15% . . .
Posted by Larry Doyle on October 28th, 2009 9:22 AM |
. . . would you be surprised? What would you do? What if the market declined by 20%? Would you be surprised? What would you do? How about if the market rose by 10% to 20%? Would you be surprised? I would.
The reason I ask these questions is an attempt to address the fundamental question as to what the market is telling us and what American consumers believe.
The equity market has traditionally been a reliable indicator of the future economy. The market provides a discounted valuation of future earnings. Those earnings drive companies and the economy at large.
As the market declines and prospects wane, businesses and consumers react accordingly. On the other side of the coin, as the market improves forecasting an improving economy, businesses and consumers react accordingly . . . until now. What is going on? (more…)
