Thursday, June 11, 2009

Bears, Bulls and Squirrels

There's something squirrelly in the stock market lately, some kind of disconnect between the Dow Jones and the economic indicators. As of 11:30 a.m. EDT, the DJIA was up 80 points, even while we're seeing clear signals of recovery-killing inflation:
Treasury 10-year note yields reached 4 percent for the first time since October on concern surging budget deficits and a falling dollar will prompt investors to reduce holdings of U.S. debt as issuance climbs to a record.
Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation.
"People are increasingly concerned about supply," said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. "The government running a deficit of 12 or 13 percent is not something we’ve seen since World War II. It's very hard to digest."
Ed Morrissey calls attention to the spiking money supply, and gas prices are ticking up -- both inflation factors. What to make of the fact that the Dow keeps rising despite all this? The best I can figure, you're seeing a continual stream of new "buy" orders that are essentially a function of 401K and other accounts pre-set to purchase X-amount of stocks every week, and which are therefore immune to short-term economic signals.

In the event of a sudden bear shift -- a sell-off by institutional investors and market-timers -- individual investors with these kinds of pre-set retirement accounts will be the big losers, because they are scheduled to keep buying a certain percentage of stock every pay period, whether the market is up or down.

On plus side, these 401K account holders (call them "squirrels") add stability and a steady upward pressure on stocks. On the negative side, the 401K squirrels already took a big hit in the 2008 market meltdown. With unemployment rising, more and more squirrels are feeling the pinch. If they get burned by another meltdown . . . well, who knows whether they'll wise up, and what they'll do once they figure out they're being played for chumps?

UPDATE: Another possibility? Kudlowism, defined as the bullish influence of Larry Kudlow, who's never seen a market signal that didn't say "buy." I'm sitting here with CNBC on the tube, and Larry's giving the most rosy possible interpretation to every indicator that comes across his desk.

Classic Kudlowism: Hundreds of thousands of new unemployment claims reported, but there are fewer new claims than in the previous reporting period. Therefore, while unemployment continues to rise -- as both consumer buying power and productive output decrease -- Kudlow spins this as good news!

It's like trying to have an objective discussion about the relative merits of various automobile models with the salesman at a used car lot. So long as he thinks you're a potential customer, Kudlow's advice is always to buy now.


  1. I never trust anyone who's paid to be friendly and/or enthusiastic. That goes for salesmen and stockbrokers.

  2. Are we really so surprised? Our stock market is a house of cards (overused, I know), and it comes tumbling down because of the hype and hot air blown into it by these fools. Americans should not gamble their money away, especially with the sheisty con-artists that populate the industry.

  3. Green shoots. You've gotta see this.

  4. Markets can remain "irrational" longer than you can remain solvent. One of the first rules a trader must learn is: "don't argue with the tape." You could update that (since there isn't much ticker tape around now) to "don't argue with the charts."

  5. Look at the yen crosses. We might just be seeing a return to risk. Although, granted, the reason for the carry trade - to take advantage of the differing interest rates - is somewhat muted now that everyone has slashed them.

    Also from FXland: The U.S. dollar is getting pummeled again - just like before the crash. The ups in, say, EUR/USD and GBP/USD, however, are much more dramatic. The uptick in oil looks to be as aggressive. And gold can't seem to crack the 1,000 level.

    I think the only argument is the fundamentals don't support any of this, and eventually the market will correct - perhaps a replay of last July. Around mid-July is when EUR/USD started to crash from around 1.60 to around 1.23 - wiping out two years of EUR gains against USD in about 4 months. So did GBP/USD, so did the yen crosses, so did oil, yadda yadda. Given the recent aggressive moves up, though, this time 'round might be even more fun.

    As for not arguing with the chart - the trend is your friend and all that - sure. I just don't like it when a weekly chart looks like a minute chart.

  6. Alternatively, people could be thinking that cash in the bank will soon be toilet paper, bonds in unionized companies will get you a quick trip to the back of the line, and government bonds are as worthwhile as the governments that issue they're investing in stocks in hopes that people who buy cheap and sell dear can continue to function in this post-Obama world.