6/3/2013 4:15 PM ET|
Your guide to this summer's market
The trend in US stocks appears downward because of expectations of what the Fed will do. But the consensus view is volatile. Here’s how to navigate the turmoil.
Think of the current market this way: It's a puzzle where the solution shifts depending on whether you take a long-, medium- or short-term view, and where the importance investors afford to the long-, medium- and short-term views shifts from hour to hour and day to day.
Then add in that you have to solve that puzzle with significantly different time horizons depending on which of the three drivers of global financial markets -- the United States, Japan and China -- is gathering attention at the moment.
Together, this makes the market very difficult to read, very volatile and rather scary.
Here’s my guide to what’s going on, what to pay attention to and what to ignore in the next few weeks.
Consider the May 31 market action as a good example of what we can expect in June and probably into July.
That morning, a medium-term view held the court. A strong report on Midwest manufacturing activity led traders and investors to focus on the possibility that the U.S. Federal Reserve would start reducing its $85 billion a month in purchases of Treasurys and mortgage-backed assets sooner rather than later and perhaps as early as this summer or in September. That led bond prices to retreat, while the yield on a 10-year Treasury climbed 0.15 percentage points, to 2.21%. One month ago, the yield on the 10-year Treasury was just 1.65%.
That afternoon, perspective shifted back to the short-term. Bond prices had fallen so far so fast on the day and yields on the 10-year bond were now above the 2.08% yield on the Standard & Poor’s 500 Index ($INX) that short-term traders were willing to bet that bond prices would stage a modest rally.
Their willingness to take that bet increased as the weekend approached. It’s typical for traders to take profits and square positions before the weekend. Taking the end of a trade predicated on rising bond prices and falling yields had a good risk/reward ratio in the short term. And traders on that end of the trade did make a good profit, as bond prices rose and yields fell back to 2.13% at the market close.
What about stocks?
And what about stock prices? They moved in exactly the opposite direction to bonds, rallying in the morning and then falling sharply in the afternoon, largely, I think, in reaction to the move in bonds rather than to any significant news for equities themselves.
In the background for all this sits the long-term view. The consensus there is that the Federal Reserve will have to taper off (the medium-term view) and then end (the long-term view) its program of buying Treasurys and mortgage-backed assets. At best, the end to the Fed’s buying program will push interest rates higher. In an even longer long-term view, interest rates will rise as the Fed sells Treasurys to reduce the size of its balance sheet.
A lot of this consensus view is speculative. No one knows if the Fed will actually sell Treasurys -- Chairman Ben Bernanke has hinted that the Fed will simply hold them to maturity and reduce its balance sheet very gradually. No one even knows if the Fed will start to taper off its buying program in the summer or fall. The Fed has said that its actions will depend on the data, and no one yet knows what the economic data will look like in, say, September.
But 1) this consensus view seems logical and 2) this consensus view is the consensus, and that gives it influence over the U.S. financial markets, even if it ultimately turns out to be wrong.
Until we get data that say the Fed will stay on the sidelines or get growth numbers so strong that investors are willing to buy stocks no matter what the Federal Reserve may be planning, or see some statement from the Fed that recasts its policy, I think the long-term consensus will provide a bearish cast to the short- and medium-term views of the market.
Boiling it down
But remember that this relatively long-term negative view doesn’t have the stage to itself. Just as on May 31, when the bond market was able to rally because the short-term view said there were profits to be made by reversing the morning's slide, so too could a sufficient drop in U.S. stocks lead to a calculation that, in the short-term, reversing any drop would be profitable to traders who had gone long.
In other words, if U.S. stocks drop far enough, say 5% to 10% (the S&P 500 was down 2.3% from its May 21 high at the close on May 31), then I think we’ll see short-term buying pick up no matter the pessimistic long-term view.
I know this is complicated, so let me try to boil it down.
I think the trend in the U.S. financial markets is downward right now, because of the long-term consensus view that the Fed will begin tapering off its monthly purchases of Treasurys and mortgage-backed assets by September or October -- and perhaps even earlier. We could get a temporary bounce out of a disappointing jobs report on Friday -- the consensus among economists is for a weak 165,000 net new jobs -- but I think it will be hard for any disappointment to shake the consensus. I think the downward trend could easily produce another bad month for Treasurys like the 1.8% drop in the Bank of America Merrill Lynch index in May.
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VIDEO ON MSN MONEY
Everything that seems crazy, yet still happens economically, happens because Wall street wants it that way because it allows them to extract more money from the American people for doing absolutely nothing.
1. crazy money printing.
2. crazy bank bailouts.
3. crazy, not one banker jailed, held accountable, or even fired.
4. crazy, federal deficits
5. crazy, jobs went to China and elsewhere.
6. crazy commodity market manipulation allowed.
7. crazy, big banks got even bigger...
Say? Where is frankq the block stacker when you need him? Why this guy is great at story telling along with the rest of the shmucks over at the msn refugee board. Why their so called market talk board became fast history once they derailed the Decoy409 from their site.
Heck,would have loved to shove the heavy inventory (as I stated and discussed months back) that has come home and is coming in heavy. Some listened and realized that IMAGINARY SALES belong on FANTASY ISLAND. Why those clowns were quite a circus with there,"Decoy,you don't know anything" garbage talk.
When you rely upon injections for gains,instead of HONESTY,well we did warn that those supporting SHAM WoW,would,not if,come back to bite ya.
Why the more they pumped,the more we laughed!
But there is a ways to go while a inflated 10,000 plus on the djia needs to be cleared. Is and has been WAY oversold by injection after injection.
cat sounds like a pension fund manager trying to uphold their status of nothing. Hard for those of such to have any justifiable words as their words are those of a string puppet,or entertainment on Fantasy Island.
Why the question mark as to the fed will stay the course. They have stood the course for over a hundred years now so your brilliant and worthless thought,is just that.
Why still wondering where things would be if paper,ink and press would have not been able to print into 24x's of that in which should even exist in the world now? Or how about Big 'D' (derivative) world. Those rolling side bets and the pumpers of all is good.
And you still have the string puppet mentality to talk about a employment market that is shattered to pieces and grows worse by the day. with the actual number of unemployed zooming up tpo 26% here in the US (thanks to the tale of the tape by John Williams and others),along with,
May 2013 - US Unemployment Rate 24% - Just Keeping Time
Google that one.
Why we have been waiting to SEE if the string puppet quartet would be offering such as,
They’re the fastest-growing job categories in America, and also the lowest-paying. According to out last Friday from the Bureau of Labor Statistics, seven of the ten largest occupations in America now pay less than $30,000 a year.
A full-time food prep worker — the third most-common job in the U.S. – earned $18,720 last year. Cashiers and waiters pocketed less than $21,000.
The trend is in the wrong direction – toward even more of these jobs, and lower pay. And that’s not because of undocumented workers. It’s because of structural changes in the economy that have shipped high-wage manufacturing jobs abroad and replaced other semi-skilled work with computers and robots. If you don’t have the right education and connections, you’re on a downward escalator.
The real median wage of Americans is already 8 percent below what it was in 2000. The median pay of jobs created during this recovery is than the median of the jobs lost in the downturn.
but of course the they don't.
Why jumping on VL for spanking you is to be expected.
Driven by Greed and Fear,or cash cows based upon Demise.
24% hey. That's funny as while we were discussing the lost generations along with the mismatched 50/50,why the cover zone for support of such things as Dr. Roberts has discussed,and shown on many occasions as well as the the caters of.
No matter how you care to shine it up,underneath is a whole different story.
dave1230, how true. Say funny how the 'Best' is what is kicked back when coming to these blogs. I posted some really great FINANCIAL OUTLOOK material in 'Newest',but 'Best' shows up first?
'Best' of what? fat cat jargon?
First post and the editors are hard at work already,as first is edited?
May 5,2013 -
excerpt - The Financial Press: A Disinformation Machine
Dave Kranzler of Golden Returns Capital declares the April payroll jobs report that was released on May 3 by the Bureau of Labor Statistics to be “fictitious.”
Statistician John Williams () says both the jobs report and unemployment rate are “nonsense.”
I agree with both. But don’t expect the financial press to report the facts.
Let’s take a walk through the BLS report and you can arrive at your own conclusion.
The BLS report says that the private sector created 185,000 service jobs in April. Even if this report were true, it would have negligible effect on the unemployment rate as about 127,000 new jobs are needed each month just to stay even with population growth and current unemployment rate.
Mr. Fat Cat is right. Another wacko article about Asia by the Jubak audioanimatronic Disney statue.
The articles are actually written up in the Northwest by Paul Allen and Bill Gates over VERY EXPENSIVE wine.
But there is a ray of sunshine on the horizon. Evidently Jubak passed the "bend over test" in his Lulu yoga pants. Now he is moving forward investing in "lick free" taco shells.
JAISUS. I need a drink.
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[BRIEFING.COM] The major averages remain near their early lows with the Nasdaq (-0.6%) seeing the largest decline.
The index lags amid weakness in technology (-0.6%) and biotech. The iShares Nasdaq Biotechnology ETF (IBB 257.50, -1.43) trades lower by 0.5%. Similar to the biotech ETF, the health care sector holds a loss of 0.5%.
With stocks on the defensive, traditional safe-haven assets remain in demand. Gold futures trade up 1.5% at $1366.60/ozt while Treasuries sit ... More
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