Market Commentary

In my view the volatility in the markets is perplexing
November 04, 2009

In my view the volatility in the markets is perplexing after what has been a very good quarter for earnings and US economic growth.  However one must put this quarter into proper context.  We stood at the abyss and then stepped back from the cliff via massive global stimulus amounting to around $12 trillion or about 30% global GDP.

The recovery is from extremely low levels and all are wondering what is next.  In my view the last two weeks feels like retro fall 2008.  Confidence and conviction is absent thinking the last 12 weeks is nothing other than a globally induced sugar rush with the proverbial post sugar crash only moments away.

Those who are optimistic are chided as it is perceived there is no room for error and a minor shortfall could produce huge losses akin to those experienced last year. 

Has the market built in strong growth suggesting more risk than reward?

Psychologically we are all scared.   It is human nature to think profoundly negative events will again occur following continued unexpected major calamities.  However it is this negativism that actually breeds stability or aka the occurrence of a Minsky Moment.  [Extreme negativism breeds stability and vice versa]

In early 2006 I vividly recall reading a gazillion reports suggesting today’s massive diversification has greatly lowered risk.  Risk premiums all but evaporated.   This prevailing view was reflected in numerous Central Bank statements declaring the subprime issues are contained and should not impact the global economies or markets.

Perhaps history will regard the above view in the similar light as Neville Chamberlin’s 1937 infamous prognostication “We have won Peace for our Time.”  Eight years and over 75 million deaths or 4% of global population later, the entire world order changed.

While I don’t think global conflagration will again occur, I do believe Wall Street has been forever altered and the unintended consequences of government intervention to combat this crisis will be felt/discovered in the many years that will follow. 

I believe the potential turn to a European Socialistic economy led by this Administration is a direct result of this crisis and whether or not one actually develops is dependent upon the intermediate direction of the economy.

Speaking of which, I reiterate my long held belief the recovery will continue to be stronger than expected.  As written many times the consistency of this crisis is the velocity of change and expecting the unexpected.  Banks and companies are extremely liquid.  If monetary velocity accelerates—an environment that I think is all but inevitable—the primary concern will then focus upon potential inflationary implications.

Speaking of inflation, the two day FOMC meeting concludes today.  No change in monetary policy is virtually assured.  I contend a reason for recent volatility are fears surrounding a substantial change in its post meeting statement suggesting an end to the quantitative easing programs that have pushed us back from the abyss is eminent.  The statement is released around 2:15.

Today is also a big data day.  The ISM non manufacturing survey is released.  Consensus is expecting a 51.5 reading, the highest reading since December 2007 and the second consecutive of a reading over 50, the level that denotes an expanding or contracting service economy.

The ADP Employment survey is also released.   For eight of the last ten months including the last five months in a row this survey has been weaker the BLS report.  Consensus is estimating this private survey to show a loss of 198,000 private sector jobs.

Last night the foreign markets were up. London was up 0.71%, Paris up 1.45% and Frankfurt up 0.95%.  Japan was up 0.42% and Hang Sang up 1.76%.

The Dow should open moderately higher. The 10-year is off 19/32 to yield 3.50%.