The Market Grows Thinner; I Do Not

By: Michael Ashton | Thu, Dec 16, 2010
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As the year grows older, it gets more and more difficult to attribute market moves to particular motive forces. In thin conditions, a particularly motivated buyer or seller can mean a lot more than flows from investors who care about, say, the economic data...but who don't have the desire to increase risk at this point of the year.

So I resist the inclination to read too much into the fact that Housing Starts, Initial Claims, and the Philly Fed index were all stronger-than-expected today but the bond market and stock market both rallied. To be sure, Housing Starts and Claims were insignificantly stronger-than-expected, but I really thought when Philly Fed printed 24.3 - a new 5.5-year high - the bond market was going to be toast. The Employment subindex declined to 5.1 from 13.3, but this is too subtle for mid-December. Bonds dribbled lower, but then rallied for the balance of the day.

There was news today that the ECB is planning to roughly double its capital by adding €5bln over the next three years, at least in part as a buffer against losses on government bonds it has been buying. This isn't to cover potential mark-to-market losses on money-good bonds, because the ECB (like the Fed) isn't required to mark to market. The only way these bonds would become losses is (a) if they were sold at even lower prices than where they were bought, in which case there would a realized loss, but in that case then the program didn't do a very good job, did it? or (b) if those bonds default. Either way, this is hardly a vote of confidence about the solidity of the system!

There were a number of earnings announcements today. RIM, Oracle, and Accenture (disclosure: I own none of the stocks mentioned in today's commentary) all beat the expectations for their earnings, but FedEx missed. Quick quiz? From a macroeconomic standpoint, which do you think is a more important bellwether: the tech companies or FedEx? This is a surprising miss if the economy actually is improving as it appears to be.

Yes, it's true: the fact that the news these days is occasionally good, rather than being entirely bad, is a qualitative change that is worth noting. But to me, it appears as if this qualitative change is already discounted in the stock market (and stocks rallied 0.6% today). It may happen that the market now decides to discount a further qualitative improvement, but it may also happen that the market declines because bonds also discount such a qualitative improvement and yields rise!

That didn't happen today, though. 10-year Treasury yields declined to 3.44%, but 10y TIPS outpaced them again. The rally in fixed-income, despite this improving news, may indicate that the bond sellers are finally exhausted and bonds are ready to bounce. In September, I might bet that way. In December, I'm more cautious about that view and since buying bonds at 3.44% for me is at best a short-term trade, it isn't one I wish to make at this time.

And that is the effective end of data for this week. Friday sees Leading Indicators, but that isn't a significant report.

As we approach the solstice, the days and the commentaries get shorter and shorter. What is more, a dozen years or so of writing this sort of comment has convinced me that also ebbing is the number of people who have the time and the desire to read remarks about markets that are twisting randomly (and mostly, gently) like a wind chime in a summer breeze. Too, the pundit needs a mental break, and this is a good time to take one.

Accordingly, this is my next-to-last planned commentary of the year. Tomorrow's comment will present the 10-year expected returns for various asset classes that I am using in my own portfolio modeling, and make some general wrap-up observations; after that, the next scheduled commentary will be on January 4th (the Tuesday after New Year's Day, since I am traveling January 3rd). It is unlikely, but possible, that if market conditions warrant I may post something in the intervening two weeks, but I don't plan on it!

Thanks to everyone who has taken time to read these comments this year. On the various places this column is "syndicated," it has collected something on the order of 600,000 comment-views this year. That's not John Mauldin territory, but it makes a guy like me feel useful! Thank you, and thank you for continuing to refer the material to your friends.

 


 

Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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