Market Commentary

Data released this week has suggested an anemic economy
January 15, 2010

Data released this week has suggested an anemic economy at best.  Equity markets have shrugged off these statistics perhaps under the guise this data was skewed by poor winter weather.  Earning optimism is also great.  As noted several times fourth quarter profits are expected to surge by 62% breaking a record nine consecutive quarters of declining results.

Transition points are often volatile.  There will be inevitable setbacks as nothing moves linear.

I reiterate my long held view monetary policy will be altered sooner than most expect, perhaps by the end of the first quarter., the result of stronger than expected rebound in the economy. When this inevitable change does occur; I think equities will experience a period of tough sledding as it will take time for investors gain confidence the world will not come to the end as the economy begins to be weaned off of its high octane energy.

Considerable attention has been focused upon a falling VIX, or The Chicago Board of Options Exchange Volatility Index.  Several days ago it was at the lowest level since June 2007 but has since rebounded to around 17.  Twenty is the average level during its two decade history. [Bloomberg] The VIX peaked in 2008 at 80.86.

Are equity investors becoming complacent or is there just little interest in stocks?  Dow Jones newswires recently reported 40% of recent stock trades were the result of “flash trading” or the rapid computer generated exchange of securities.  Dated data (early December) indicated outflows of funds from money markets gravitated to corporate and municipal bond funds at a rate of sixteen to one.  Several discount brokerage firms reported a decline in the number of trades conducted by its clients.

As stated above, I believe we are at an inflection point; perhaps the magnitude of this inflection point cannot yet be grasped.  What are the odds the vast majority of retirement funds will now gravitate back to fixed income vehicles?  Historically 70% of all retirement funds were invested in bonds via employer controlled defined benefit plans.

This began to change around 1983 with the advent of the employee controlled 401K plans.  It was around 2000 when the 70% threshold was again crossed, but this time 70% of retirement funds invested in equities, the level that exist today.

Will this ratio begin changing back to the 50% or the level that existed around 1996?

Is the VIX perhaps suggesting this?  As evidenced by consumer confidence surveys, workplace and economic confidence is low, a level that that negatively correlates to VIX that is below its 20 year average.

Speaking of confidence, the University of Michigan Consumer Confidence is released today.  A 74.0 reading is expected.  The CPI, Industrial Production/Capacity Utilization and the Empire Manufacturing Index are also released.

Today could be volatile given the various interpretations of these top data tier points amplified by the earnings release of two market bellwethers…Intel and JP Morgan.

Last night the foreign markets were down.  London was down 0.10%, Paris down 0.42% and Frankfurt down 0.84%.  Japan was up 0.68% and Hang Sang down 0.29%.

The Dow should open moderately lower on mixed earnings reports.  JP Morgan disappointed analysts with a slightly lower than anticipated revenues yet profits topped expectations.  Intel on the other hand surpassed estimates.  Can I remotely suggest buy on rumor and sell on fact?  The 10-year is up 8/32 to yield 3.71%.