Why be optimistic a deal can be struck on the fiscal cliff? Because there are weak links in the Congressional strongholds. Not only has the GOP shown some willingness to negotiate, but there are also a handful of Democratic senators up for re-election in two years, hailing from largely traditional GOP red zones, who will want to keep their jobs. Look for at least a few of them to show “temperance” and move to the middle on the Fiscal Cliff.
Red-State Senate Democrats May Be Hard to Corral on Cliff– Bloomberg Businessweek
As said on this blog previously, Europe will surely be weak economically this year, but probably not as weak as many fear. The reason: the rest of the world—which is stronger—will drag it forward.
A prevailing worldview among economists is that a weak region will “infect” the rest of the world. This can sometimes be true, but usually the opposite is true: a stronger rest of the world keeps the weak region afloat. Europe is big, sure, but the rest of the world is far bigger, and that features the US and Emerging Markets—two relatively strong areas.
Recent data is confirming this notion:
January Eurozone Flash Composite PMI Points to Growth, Beats Estimates
Actual: Manufacturing: 48.7, Services: 50.5, Composite: 50.4
These two headlines from Bloomberg, of course, are being mostly hailed this week as bearish indicators:
- European Economic Confidence Falls Most Since December 2008
- Consumer Confidence in U.S. Falls to Lowest Since April 2009
The irony! The 12 month periods after December ’08 and especially April ’09 marked one of the best times in stock market history to be invested. Simply, and this has pretty much always been true, sentiment numbers of all stripes tend to be at best coincident indicators, but are usually slightly lagging. That is, they have virtually no forward predictive power for the economy or stock market.
An interesting piece from Roger Lowenstein in Bloomberg Businessweek.
Wall Street: Not Guilty: Why have no executives gone to jail for their roles in the financial crisis? Perhaps because risk-taking and stupidity aren’t criminal
Increasingly clear over the course of the last couple years is that traditional “breaking news” feeds just aren’t good enough anymore. Traders, hedge funds, and others that need to know “first” about events that could move markets have moved on from the AP and Bloomberg. Those things are slow as snails nowadays.
Instead, play around with Google News—you’ll notice immediately that Tweets, blog posts, and other information hits a Google search basically instantaneously, and this is now the way to get up to the millisecond news. There have been all sorts of amusing articles in the last months about hedge funds who base some of their strategies on Twitter feeds, have their own proprietary internet search software to crawl the web, even have folks on the ground in key spots to text and email news wherever it happens! And I believe it.
Mind you, I have no idea why an average investor would want most of this kind of information—my sense is that it would do nothing but give the illusion of knowledge and make you ever more prone to investment mistakes (if you don’t have the fastest trading technologies and strategies, fastest news means little). Also, this kind of breakneck speedy news also screams the possibility of falsities, unfounded rumors, etc.
But at any rate, the way folks get their market information is evolving.
Here are some good writers you’ll be entertained by, and also get smarter in the process of following them:
And Tom Brown at www.bankstocks.com. He’s full of accessible insights for non-pro bankers. And his wit and reason are biting.
Remember when stress tests were all the rage and we felt the world economic order was hanging on the results of such things? I do, it was the spring of 2009—not so long ago. Back then, this headline would have incited mass consternation at best, and mild panic at worst.
Nowadays, it’s barely worth a shrug. We’re over it. “Systemic failure”, that ubiquitous catchphrase of the last couple years barely gets a shrug any longer. Now, I know what you’re thinking: “Here comes the didactic tirade about how we’re about to repeat the same mistakes as just a couple years ago.”
Nope, the opposite. This is to remind folks that not only did the world not end in 2008, but actually much of the system proved much stronger than many believed (the economic and capital markets recovery simply couldn’t have happened so strongly and for this long were it otherwise), and that much of the doomsday talk never materialized. It’s vogue to want to hold folks accountable (Why Isn’t Anyone From Wall Street in Jail?) for the bear market, but why not call out the folks who kept investors out of the now ~100% run up in stocks since the bottom?
I’m being facetious, of course. But only a little. The world didn’t end; it wasn’t different this time.
One thing I know, the world is expecting ever higher food and commodity prices. You can basically pick up any periodical these days and read something about it. Here’s a couple recent examples:
Maybe you agree with these views. But what matters for investing is what you believe will happen relative to current expectations. In this case, the question is will commodities/food prices come in higher or lower than the consensus view? Because the consensus view (particularly stuff as broadly aired as Fortune and TheStreet.com) should already be mostly reflected in share prices. My experience is that food supply is more adaptable than people usually believe/extrapolate, which argues that a surprise in higher food supply is more likely than many appreciate today. But whichever way you go, note that to make a bullish bet on this issue means you think prices will be even higher than soaring expectations. Maybe it’ll happen—but step with caution. It’s not as easy as simply agreeing with the consensus view.
Another example: Refiners have had a heck of a run recently. Should you get in? A recent Bloomberg headline reads: World Diesel Demand Makes Refiner ‘Diamond Age’: Energy Markets. Will results for refiners come in even higher than “diamond age” expectations? Maybe, maybe not. But that’s the question an investor faces.
Lastly, a brief non-Investing tangent: There’s been a tumult of books and essays lately released about how modern media is killing/skewing/altering traditional books and how that changes the way our minds work. David Shields’ new book, Reality Hunger, is not only a good meditation on those subjects, it’s also an experiment in form. The book makes its arguments in little prose bites, none of them more than a page or so long. It’s staccato and sometimes jarring, but there’s also a certain kind of rhythm to it that makes it flow nicely. What’s most refreshing about Shields’ work is that it allows the form of books to morph into how minds are working these days as opposed to arguing whether long form books are becoming obsolete. This is a much better way to meditate on the issue than to lament over the fact that few people read really long books any longer.
The dividend yield of the Dow Jones Industrial Average is basically the same as the yield on a 10-year Treasury bond. In fact, bond yields have been lower lately. (Both in the 2.5% to 3% territory.)
This is completely nuts and can’t last forever. Now, I’ve never been a believer in seeking after dividends for their own sake—it’s ultimately just one form of investor return. But good golly—when stocks’ dividend yields match long term bonds…not including the expected price return you’d get from, say, earnings (remember those?), it makes the decision between stocks and bonds a hall of fame level no-brainer. (And by the way, earnings are surging way beyond previous expectations so far this year.) Even if bond yields come up from here, the hurdle they have to clear to be competitive with the earnings yield on stocks is way high at the moment.
These numbers are a reflection of pure, non-rational fear, and won’t last forever.
Source: Dow Jones Industrial Averages, Bloomberg