Payroll and unemployment numbers come out tomorrow. I've been watching the Birth/Death model for months now. This model is meant to adjust employment numbers to take into account the Birth and Death of businesses. The problem is that statistical forecasting is much better at predicting the trend going forward than it is the turning point. If the economy turns south, the BD numbers will make the situation appear rosier than it would be otherwise. Mish, Barry Ritholtz, and John Crudele have all expressed concerns about the numbers. Briefing.com shows the consensus around 70,000-80,000 compared to a prior number of about 18,000. I'm agreeing with Barry and John that the number will probably be significantly lower. Maybe as much as 25-50% lower. The reason, explained by each, is that every year there is an annual rebalancing of the Birth/Death Model to recalibrate their estimations. If there is a significant deviation of the model with reality, the model will be adjusted to take that into account. In a time when advance GDP in Q4 came in at .6% and Q3 was only up due to better than expected inventory numbers, it's likely that there will be a significant adjustment.
From the short-term perspective it will be curious how the market reacts. If they are not aware of this information (traders read the Post for sports not finance), they will think the economy is worse than expected and play up hopes for a rate cut. However, they will have to weight rate cuts with a shitty economy. The person who follows the Birth/Death numbers already knows that the intermediate outlook for the economy is absolutely awful and the numbers have made it appear much better and should already be short (or in bonds) in that time frame. In the shorter-time frame, it will be easier to just take advantage of those who don't read the Birth/Death numbers. For the short-term, Gold will be a buy no matter what the market thinks will happen.
Thursday, January 31, 2008
Wednesday, January 30, 2008
1/30/2008 rate cut
The Federal Reserve cut interest rates by 50 basis points today. Despite the 10 minute (or so) squeeze, it was a profitable buy until later in the day when the Dow gave back most of its gains. Market commentators claimed this way due to bad news about Ambac and MBIA. Unfortunately for them, the news about Ambac and MBIA was out before the cut and no one reacted to it. I think the likelier explanation is that three days ago the discussion was 75 or 50 basis points and today it was 25 or 50. If the cut were 75 based on the information from 3 days ago (ex GDP-advance numbers at only .6%), then I would have thought the market would behave exactly how it did today. Go up huge and give back its gains when people realize the problems are worse than people realize.
For some time, I have been very bearish on the market. For one of my econometric classes, I developed a statistical model to estimate the probability of a recessions that's very similar to Merrill Lynch's model (I compared indicators from Kasriel and Mish). That model began predicting a recession in the next six months back in June and was giving scary readings as early as April. However, right now there is a competing influence that adds significant uncertainty to how bearish I am for the intermediate term (next 3-6 months). True, the housing crisis is a disaster and the stimulus plan and the rate cuts ultimately will harm the economy much more than it will help it. However, for as many bad numbers that come out, there are good numbers as well. What worries me most right now is inflation. 125 basis points in 8 days is a recipe for disaster if the economy isn't as bad as people think. Inflation is 2.6% right now and if the economy doesn't significantly slow or enter a recession, then inflation will come back with a vengeance, most likely after there has been significant time for the housing crisis to truly be felt. So if I were holding/shorting stocks for the next 3 to 6 months, I would most likely get out into something safer until I could figure out where the general market would stand. The fed might cut one or two more 25 basis point cuts over that period and treasury bonds and tips will likely do well over that period. While I am bullish on commodities, industrial commodities will not do stellar in a slowdown or recession. Gold is still a buy if it pulls back.
Lastly, I've been reading Intermarket Analysis by John Murphy. I have to say it is probably one of the best books out there on technical analysis for the person with longer time horizons. Murphy centers his discussion on interpreting trends among many different markets and it is pretty good. It amazes me when (most?) economists say they put all of their money in index funds. They are trained to study markets and rather than put their money where their mouths are, they give up. Especially when most of the trends can be seen a mile away.
For some time, I have been very bearish on the market. For one of my econometric classes, I developed a statistical model to estimate the probability of a recessions that's very similar to Merrill Lynch's model (I compared indicators from Kasriel and Mish). That model began predicting a recession in the next six months back in June and was giving scary readings as early as April. However, right now there is a competing influence that adds significant uncertainty to how bearish I am for the intermediate term (next 3-6 months). True, the housing crisis is a disaster and the stimulus plan and the rate cuts ultimately will harm the economy much more than it will help it. However, for as many bad numbers that come out, there are good numbers as well. What worries me most right now is inflation. 125 basis points in 8 days is a recipe for disaster if the economy isn't as bad as people think. Inflation is 2.6% right now and if the economy doesn't significantly slow or enter a recession, then inflation will come back with a vengeance, most likely after there has been significant time for the housing crisis to truly be felt. So if I were holding/shorting stocks for the next 3 to 6 months, I would most likely get out into something safer until I could figure out where the general market would stand. The fed might cut one or two more 25 basis point cuts over that period and treasury bonds and tips will likely do well over that period. While I am bullish on commodities, industrial commodities will not do stellar in a slowdown or recession. Gold is still a buy if it pulls back.
Lastly, I've been reading Intermarket Analysis by John Murphy. I have to say it is probably one of the best books out there on technical analysis for the person with longer time horizons. Murphy centers his discussion on interpreting trends among many different markets and it is pretty good. It amazes me when (most?) economists say they put all of their money in index funds. They are trained to study markets and rather than put their money where their mouths are, they give up. Especially when most of the trends can be seen a mile away.
New Blog
I am a recent graduate of a graduate program in Economics (where Israel Kirzner taught) and thankfully just heard that I passed level 1 of the C.F.A. exam. I mention that only to say I know a little what I'm talking about, but I'm always learning more. I am working in the finance industry trading equities principally on a short-term intraday basis. This blog will reflect my opinions about current short-term market conditions, long-term prospects as well as my thoughts and opinions about Economics in general. I don't mean to comment on politics (about which I tend to be so passionate that I am indifferent between most candidates) except in relation to how policies will affect the market. I'm not sure how long this blog will last or how much I will get out of this or if I will have any readers at all. One thing I know: if there's a time to take risks, it's when you're young.
I will generally try to stay away from discussing set-ups, entries, exits, money-management, or any other specifics about trading strategies. This site is mostly for commentary. That said I might put on different "time horizon" caps when I discuss different subjects. From the short-term perspective (5 to 15 minutes) a Fed rate cut (like today, 1/30/2008) might be a good chance to earn a good return. However, that doesn't imply the same strategy should be adopted by a long-term investor. Given my short-term strategy, I can frequently change from a bullish to bearish perspective and back with little thought or cost. This may not be the case for the person with a longer time horizon and I will do my best to make clear what my thoughts are on the market and the time horizon for those thoughts.
I will generally try to stay away from discussing set-ups, entries, exits, money-management, or any other specifics about trading strategies. This site is mostly for commentary. That said I might put on different "time horizon" caps when I discuss different subjects. From the short-term perspective (5 to 15 minutes) a Fed rate cut (like today, 1/30/2008) might be a good chance to earn a good return. However, that doesn't imply the same strategy should be adopted by a long-term investor. Given my short-term strategy, I can frequently change from a bullish to bearish perspective and back with little thought or cost. This may not be the case for the person with a longer time horizon and I will do my best to make clear what my thoughts are on the market and the time horizon for those thoughts.
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