Sharks are in the Ocean

 

Confusion itself is damaging to market momentum. It pilfers our inspired affections, deep seeded convictions and warps our best wisdom. Muddle and mayhem quickly turn tailwinds to headwinds – shredding our sails of sincerity in the process - reducing them to tattered ribbons. And that’s precisely what we were greeted with early last week as a mass of data – or, mess of data – was introduced to us from China (i.e., inflation stronger than expected, Industrial Production and PMI’s softer than anticipated) clearly testing the markets tone and trajectory. It became abundantly obvious the direction of things has suddenly become harder to grasp now. And yet, the market remained faithful, firm, and fixed in its conviction to grind higher.

Market anguish escalates as the perplexity persists. Adding to the angst of traders was coming to terms that no one can properly identify the catalyst of this market. On one hand, we are comforted that the latest numbers, in aggregate, are pointing to the US nearing escape velocity. On the other hand, 10-year US Treasuries rose closing the week yielding below 2.0%. Shouldn’t yields be rising as our economy heals? However, in an effort to be fair-minded, perhaps we should think of US rates on a comparative basis as they are actually substantively higher than many of our peers (e.g., Germany, Japan, and UK). Just a thought.

Adding to the week’s randomness, gold’s 18-month broad and volatile trading range continues however, demand support was back pushing it up/near the very important $1600oz. level. Fear based buying? Inflation imminent? Just a month ago, (gold below $1560oz.) the conversations were getting longer and louder with regards to gold being overvalued by any standard measure. Perhaps the buying momentum has nothing to do with fundamentals and everything to do with history? Gold has encompassed countless kings and conflicts and its value has ebbed and flowed typically based on the fear of unfamiliar monetary/fiscal policy of those governments. As “there is nothing new under the sun,” we can add Central banks to that list.

The farther this market grinds and the serener the news headlines remain the more traders dread that some colossal shoe is about to drop. What bubbles to the surface next is being raised with increased regularity with the unspoken notion being that the present unruffled atmosphere depicted by lack-luster trading, low volatility, low correlations, and quiet news is blatantly wrong and will end soon. Honestly, my biggest concern is the sheer amount of trembling and gnashing of teeth caused by any decline – including the very benign set-backs witnessed on Tuesday and Friday. I’m interpreting this as a genuine sign of near-term risk.

Markets have, can, and do move for no reason and any reason at all. What has defined this market going back to July, 2012 continues to this day – a very motionless macro-drop – where everything is nice and quiet. Below, is a sampling of upcoming government releases for the week beginning March 18, 2013:


• Monday 3/18/13 – NAHB Housing Index (March) – After falling down a six-year flight of steps, builders appear to be climbing back! After slipping last month (first time in 10 months), look for a March rebound – reinforcing the trend.

• Tuesday 3/19/13 – Housing Starts (February) – Following a “mixed message” January number, traders have high expectations for a rebound in February. The bar has been set for an approximately annualized number of 917,000.

• Wednesday 3/20/13 – FOMC (expanded-format) meeting – The press has seen and heard a lot from Bernanke lately and Wednesday will provide three additional chances for questions and re-iterations. Various and sundry insights, thoughts and questions:

1. Odds suggest KC Fed President George to dissent in favor of the current policy. Will he be joined by anyone else?
2. What’s more worrisome – an expanding balance sheet or exiting too soon?
3. Perhaps particular detail on, “…outlook improves substantially,” with special emphasis on the word “outlook.”
4. What are Bernanke’s views on whether a global “FX war” has started?
5. What will happen when the Federal Reserve stops purchasing tens of billions in Treasury and Agency debt every month?

• Thursday 3/21/13 – Initial Jobless Claims – It’s comforting to see this number falling each of the last three weeks to 4 ½ year lows. Market needs to see a persistent “below 375,000” print – adding proof that perhaps the labor market is indeed improving.

• Thursday 3/21/13 – Markit US PMI Preliminary – The flash PMI’s print Wednesday night 3/20 (China) and Thursday morning 3/21 (US & Europe). It appears the PMI’s are becoming increasingly significant – providing a reasonably sound and speedy update on global growth. As of late, the market seems to care less about the actual number and more about the directional trend.

• Thursday 3/21/13 – Philly Fed (March) – Peculiar that the Philadelphia manufacturing region has been “bucking the trend” falling to an 8-month low last month. Has the region (finally) halted its shrinking? Markets will be paying close attention.

It is true that US growth metrics continue to turn heads as jobs, consumer, and manufacturing data points all meet/top expectations. Euro numbers albeit “mixed” are overshadowed by investors recent faith in Europe’s Sovereigns market access (i.e., LTRO, OMT). In a quirky sort of way this perceived market backstop has prevented the regions many problems from taking on global-macro significance. Headline risk has moved from the front page to the funny pages. China’s recent cross-current economic releases surely has added confusion – giving severe credence to both the dove and the hawk – yet, the market right now seems to be offering sympathy and occasion.

This most recent market vibe draws a strangely familiar parallel to the summer of 2010 where after six months of hard-core training, I was ready to compete in a long-distance swim race along the New Jersey coastline. Incidentally, the summer of 2010 was also marked by very warm ocean temperatures and thus, a myriad of shark sightings where beaches were evacuated and even closed. Upcoming race participants were e-mailed of the nervous situation – alternative dates were being suggested and full refunds offered for the inconvenience. Despite the drama, the race went as planned and no one encountered a shark. The ensuing analogies were clear. First, there will always be sharks in the ocean and it’s foolhardy to suggest or plan otherwise. Second, the shark that gets you is probably the one you’re not looking for.
 

Larry Shover, SFG Alternatives
 


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