Archive for May, 2009
May 30th, 2009 | 
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Paradigm Shift: Expect Higher Volatility
The equity markets may continue higher in nominal terms but that doesn’t necessarily mean the real economy is improving. Theoretically, if enough money is printed, the market could even reach new highs! The market prices will grab the headlines but they veil what should be of greatest concern: real growth.
The printing of enormous amounts of money is a fundamental event that can lead to higher prices. Just because other more obvious factors, such as industrial production, home prices and so forth cannot be identified as causes for a market rally does not mean no fundamental factors exist. The policy of the Federal Reserve has an overarching impact.
Essentially, the creation of money can lead to a boom in the short-term which is why some months ago we noted that a paradigm shift may have occurred and, in spite of economic weakness, the market could continue to power higher. Such a boom is never lasting because its origination is not from production but contrived through monetary policy.
So, what will be the result of printing so much money? Increased volatility. Volatility is exceedingly difficult for most traders to manage. However, mastery of options facilitates risk hedging strategies and greater control.
Moves of 30%-40% over the course of year will not be uncommon and has already been evident twice in the first half of 2009. We’re here to help you master options trading so don’t hesitate to ask us questions.
Market Outlook May 27
After the stock market powered higher on Tuesday, May 26 following consumer confidence numbers and an Apple upgrade, the question is will the rally be sustained? Find out here!
8 Recessions
Looking at current readings of economic indicators compared to the averages of those in the past eight recessions, some striking data appears.
A comparison of Real Personal Income shows current readings below prior readings, which came in at -1.5%. Current readings for Non-Farm Payrolls, which is effectively an employment reading, show substantial declines below the -1.2% average of prior recessions.
Industrial Production looks no better. In fact, the average of past recessions is a figure of -3.8% but again current readings are below that figure. And the same can be said for Real Manufacturing & Trade Sales, where the average of past recessions is -3.3% but again current readings are below this number.
As a means of stimulating the economy, the Federal Reserve has expanded its balance sheet very substantially, from $886 billion in October 2007 to $2.18 Trillion in April of 2009. The desperate measures employed have been an attempt at supporting the falling drop in US consumer sentiment and US Small Business Optimism Index readings, the latter of which is very substantially below its 20 year low, sitting at 81.0.
The efforts so far have not impacted the Initial Unemployment Claims which have risen to a 4-week average that eclipses those of the tech bubble.
And the US is joined in its suffering by countries like Spain, Greece, Ireland and Italy. The 10yr government yield spreads in Ireland and Greece are approaching 250 basis points, while those in Italy are still under the 200 marker and Spain is showing a slight decline from a February peak.
The data is indicative of the past and the markets are forward looking so we must pay special attention to the markets. But ignoring such severe readings could lead to market complacency whereas a strong understanding of the fundamentals will lead to skepticism of even the most powerful bear market rallies.
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