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HomeGreater Fool Theory: STRONGLY RECOMMENDED READING
Posted by Larry Doyle on June 13th, 2009 8:14 AM |
Investing is often much more an art than a science. What moves markets both up and down often will defy any logical line of reasoning. That fact can and will frustrate many money managers.
While I traded on Wall Street, I was fortunate to experience many different types of markets and the driving forces behind them. Ultimately I learned that over the very long haul, fundamental analysis will carry the day. That said, for protracted periods the mere flow of funds and market psychology embedded in technical analysis can be powerful if not overwhelming.
I addressed this line of reasoning the other day in writing What’s Driving the Market. I find it particularly uncanny that the lead article in today’s Wall Street Journal, Stocks in the Black on Gusher of Cash, navigates this same line of reasoning.
I wholeheartedly agree with the analysis put forth by the WSJ. I want to juxtapose my writing with that of the WSJ to highlight a theory which readers will likely never see or hear from individuals involved in the financial industry. Coming from a family of lawyers, allow me to “make my case.”
In my piece on Thursday, I wrote:
From my perspective, the Fed and Treasury have created nothing short of a flood of liquidity throughout our financial system and economy. While the economic activity is anything but robust, this money is in the system. Banks are not aggressively looking to lend and will not cut interest rates or credit standards. The shadow banking system (securitization process) remains stagnant.
Thus, where does the money/liquidity go? Much like pools of water after a torrential rainstorm, the pools of liquidity in our system are looking to penetrate any available crack and crevice.
The WSJ writes this morning:
governments around the world are pumping money into the economy at a frenetic pace. Because businesses can’t put trillions of new dollars to work in such a short time, the money is finding its way into financial markets. Some investors have begun speaking of a “bailout bubble” being created in certain markets, and about a “melt-up” in demand fueled by the growing supply of money.
“All that money that was printed had to go somewhere,” says Joachim Fels, co-head of global economics at Morgan Stanley.
As anybody involved in finance can appreciate, “follow the money” holds not only for criminal investigations but also for investment purposes. Let’s continue “down the river.” (more…)
Sense on Cents Navigates the Markets
Posted by Larry Doyle on June 5th, 2009 12:41 PM |
Navigating the markets on the day in which the employment report is released is always fascinating. Why? Typically the release of new and meaningful information generates very heavy volume; as such, the market moves can be measured with greater weight. Let’s take our equipment and head out along the trail . . .
Equities: major market equity averages opened very firm after the positive tone embedded in the non-farm payroll component of this morning’s report.
As the day has moved along, though, these indices have all faded. The DJIA is up approximately .4% as of this writing. The S&P 500 and tech heavy Nasdaq are unchanged relative to Thursday’s closing levels.
Particular industry groups that have had outsized moves are mortgage finance (-2.2%) and industrials (+.93%). What’s going on here? The mortgage finance companies are negatively impacted by higher interest rates (more on that in a moment). The industrials are likely benefitting from the perception that the economy may be slowly turning the corner.
Bonds: this is where the real action is occuring!! Various sectors of the bond market are down anywhere from .25% to 1%. It appears the only bond sector improving on the day is the high yield space (+1-1.5%) as it is benefitting from the perception of lessened credit risk.
The biggest loser on the day is the front end of the U.S. Treasury market which has backed up an EYE-POPPING 25 basis points. The intermediate to long end of the Treasury yield curve has backed off by 5 to 15 basis points.
Bonds are faced with 3 major hurdles:
1. massive supply: as global governments, corporations, municipalities, and individuals all look for credit.
2. inflation : as much as analysts will point to the lack of any wage pressures, the fact is that the U.S. has so much liquidity in the system that any hint of an economic spark will be akin to dropping a match on dry hay. The Fed can only dampen the “hay field” by withdrawing liquidity from the economy. How? Increase the Fed Funds rate or sell Treasury or mortgage assets currently on its books. What would that mean? Push interest rates even higher, especially on the front end of the yield curve. What would that do? Slow the economy.
3. the Fed: Big Ben, (Turbo-Tim as well) and team may find themselves between the proverbial rock (a fragile economy) and a hard place (fears of increasing inflation) sooner than they think.
Currencies: the greenback is doing better on the day. This seems counterintuitive to an economy regaining its footing with investors taking on a greater risk appetite. What’s happening? In my opinion, the greenback is anticipating that Bernanke and the Fed may have to “think” about increasing the Fed Funds rate.
Commodities: slightly weaker on the day.
Other news of note . . . Bloomberg releases a story highlighting the charade being played by banks in “generating” earnings. The fact is banks have benefitted tremendously by “accounting” maneuvers and as such are “masking” sizable losses. Regular readers of Sense on Cents have witnessed my addressing these issues. That said, I recommend: Bank Profits From Accounting Rules Mask Looming Loan Losses.
In summary, we are clearly entering the next stage of the Brave New World of the Uncle Sam Economy. The key attribute of this phase will be higher interest rates.
LD
