We work with several interns from local colleges and attempt to help them understand the financial services industry from a number of angles. The business itself, the variety of career opportunities, the economy, investments, politics, and the financial markets are a few of the topics we attempt to share real world information with them. Remembering my own transition from academia to a career and its challenges, we try to give them as much real world experience as we can. We remind them that this tough job market could last a few years and at this point there is probably no such thing as too much preparation.
When we talk about the economy we impress upon them the unprecedented events, factors, and strategies occurring right now. Bailouts, quantitative easing, negative real interest rates, sovereign insolvencies, and burgeoning deficits are some of the dynamics currently colliding. We explain to them that if they can understand how unusual these times are then it might be easier to grasp what a more typical economic/market environment would be like. We have found it can be simpler to understand the playing field by studying the exceptions rather than the rules as many times the exceptions define the rules.
The point of today’s missive is to depict how two important landscapes, our economy and financial markets, are experiencing numerous unprecedented situations and there is a possibility that no one truly knows what the potential outcomes are? We can understand preparing for one or two of them, but when you have several and some of them never unfolding before (QE2), it can shift how portfolios are managed. We have come to the conclusion flexibility and vigilance are the two key components in investing in these curious times.
Let’s start with the economy, just last week our policymakers played a card never dealt before. The International Energy Association (IEA) holds strategic petroleum reserves (SPR) to use in case a crisis unfolds. Only twice in the past have reserves been used, Katrina and the 1991 Persian Gulf War. It does not appear we are currently in crisis mode? With the price of gasoline above $4 earlier this year, it appears a concerted effort to bring the ppg down so consumers have more discretionary income. Another possible intent may have been to send a message to speculators who have been accused of propping energy prices for personal gain. Using energy reserves in this manner is unprecedented.
Most of the feedback on the controversial Fed strategy, Quantitative Easing 2, has been negative as the unemployment rate is stubbornly high and recent GDP numbers were anemic. What most don’t ask is where would we be if they did not do it? QE2 comes to an end this week and we imagine there will be some continuing “below the radar” stimulus from the likes of the Plunge Protection Team, after all the campaigning has clearly started and we are sensing this administration is starting to play economic catch up. Other strategies that we believe you will see in the coming weeks include raising the debt ceiling (pretty much a no brainer), waiving the taxes on funds stuck overseas of our multinationals (Bush did the same thing), possibly drilling in Alaska, and extending the payroll tax holiday. We have to admit that they may have a few more bullets left, too bad they are driven more by the election cycle than our needs.
Here’s a good one, in 2002 Goldman Sachs assisted Greek government officials in developing securities that would hide the true picture of their flailing balance sheet? This was to pass muster with the European Union so Greece could continue to receive loans. Apparently without this help Greece would have had to fess up earlier and bankers may have stopped throwing good money after bad sooner. GS purportedly made $300 million for that piece of advice. Ireland, Italy, Portugal, and Spain look on from a standpoint of where they may begin their negotiations with these European banks. John Stewart did a funny bit on this transaction and caution as usual with him bleeped profanity is involved.
Moving from the economic landscape to the financial markets brings about some similar dynamics. Here there are a few new marbles rolling around in the jar also. High Frequency Trading (HFT), computers trading for pennies and within seconds, supposedly accounts for 60-80% of the daily volume. Another couple of factors that have been around for a bit, but may be pushing their own envelope are naked short selling and the synthetic structure of many ETF’s. Click on the links and they will explain these topics more fully. The point is that these factors, among others, were looked at closely concerning previous market dislocations, especially last year’s Flash Crash. We are still concerned that the regulators have not fully safeguarded the markets against another potentially severe dislocation.
With both the economic backdrop and financial markets experiencing a variety of relatively new phenomena you probably can see the need for vigilance and flexibility. Up until a few years ago most investors owned “good” stocks and mutual funds for the long haul. Few financial advisors shared with them the no progress 1930’s and 1970’s. There are good arguments that we have seen the bottom and are now in a new Secular Bull Market and just as substantive data points that could lead to new lows.
Remember the purpose of this article is to help you make informed decisions, if you are not factoring these issues into your investing strategy you could be making a mistake.
Chart Spotlight
Well that was a little gloomy. As a matter of fact stocks appear to have put in a bottom last week! We avoid using too much jargon in this space, but this signal is so clear we are going to take a shot. Below is chart of the Dow Industrials and indicator we use regularly, the Moving Average Convergence Divergence (MACD don’t ask). As you can see the world’s most famous stock index made a low a couple of weeks ago, rallied for four days and then retested the previous low (green arc). The low last week was not confirmed by the MACD as it held steady (green arrow). This is known as a positive divergence and often depicts a point where the selling becomes exhausted. A rally often unfolds after a pattern like this. What encourages us is that several of the leading indices and sectors have similar patterns and makes for a stronger signal. We believe we rally into the middle of July when 2nd quarter earnings results and forward looking forecasts will dictate the next move. If they are constructive we believe we could go to new highs for the year.
Did You Know
Women’s Dress Indicator - While watching CNBC last week Todd Schoenberger, Managing Director of Landcolt Trading was interviewed. He has come up with an interesting economic indicator, women’s dresses (and not their length). He claims for the last 25 years sales of women’s dresses has been an accurate economic barometer, when they are strong the economy is good, when they’re weak it is recessionary. His theory is that the mom’s of the household will buy the kids clothing first and only when she feels good about discretionary cash flow will she spend money on herself. He says women’s dress sales are currently strong.
Final Thought
“The only function of economic forecasting is to make astrology look respectable”
-John Maynard Keynes
No comments:
Post a Comment