12/4/14…so you want an economists opinion?

Quote of the Day from the Friars Club Encyclopedia of Jokes: “If a man watches three football games in a row he should be declared legally dead.” – Erma Bombeck

Bloomberg Quote of the Day: “People need to be reminded more than they need to be instructed.” – Samuel Johnson…read and heed!

Bloomberg Top Stories:
*Draghi Says ECB to Reassess Stimulus Next Quarter as Forecasts Are Lowered
*First-Time Jobless Claims in U.S. Decrease as Companies Retain (?) Employees
*Stocks in U.S. Drop as ECB Says It Will Wait Until 2015 on More Stimulus
*Putin Vows Action on Ruble Speculators (!), Offers Amnesty on Returning Funds – LOL!
*Russia Inflation Surges to the Fastest Pace in Three Years as Ruble sinks – aww!
*Consumer Comfort in U.S. Holds Close to Almost 7-Year High – are you comfortable?
*The Other D-Word Is Set to Unnerve Central Banks Lacking Policy Controls
*Saudi Arabia Offers Deepest Crude Oil Discount to Asia Since at Least 2000
*New York Life to Buy IndexIQ, Adding Hedge Fund Strategy for ETF Investors – oh joy!
*New Your Is Biggest Winner From Bank Settlements That Fund Police Programs – !!!
*BlackBerry CEO Chen Says U.S., Canada Would Block Any China Takeover offer – yes!
*Petronas Defers $32 Billion Canada LNG Projecdt Decision on Oil-Price Drop – yep!
*Banks Need More Top Women in Management as U.S. Trails Russia, Report Says – perhaps they are too honest for Jamie and others…Like Ina Drew was!

Wednesday’s Market Summary

Stop the world, I want to get off!!! When will the lunacy (volatility) end? Remember that the big ‘V’ is the ‘mothers milk’ of traders – and the scourge of investors as it ‘discourages’ long- term investment…except for the bold, the brave, the wealthy! Why the wealthy? Because ‘stocks’ are only a small part of their investments, whereas for the vast majority it is through their 401(k)’s and IRA’s that their net worth (sic) invests. Ain’t that a bitch? So let’s start with S&P VIX yesterday since it is hovering between a bull and bear market – no ‘oscillating’ is a better term. Yesterday, on average volume of 3.6B shares it fell back to 12.50 -.35. This is versus -1.32, +.96, +1.26! Those are big moves and uncommon. Furthermore, WHEN they occur there is usually a ‘trend’ – you remember what that is, don’t you? But while your portfolio is bouncing around (one $3MM portfolio TB monitors can be up $15,000, go to -$3,000, and back to little changed in a single day! How does one deal with that? One doesn’t! You will get ‘whipsawed’! Try setting limits or stop losses in that kind of a market! You can’t. This of course pales to trading Gold or Crude!

Moving right along…The Russell 2000 small cap took honors yesterday, +0.9% vs +1.1% vs -1.6%. This was followed closely by Dow Transports +0.8% vs -2.7% vs +1.2%d. Remember these are INDICES, not individual stocks! Welcome to the casino, the world’s largest: Get a hunch, bet a bunch! But in this casino, as in most, only the house (flash traders), make money! Only index in the red was Dow Utilities -0.3% vs +0.7% vs +0.1%. Ah, but year to date they are up (price only, excluding dividends!) 22.9% – second only to the volatile Dow Transports +23.4% – the NDQ 100 is up 20% if you can ride out the volatility! A/D’s and Breadth were positive but remain highly volatile with a bias to negative. New 52 week highs were 328 but new lows declined but remain bearish at 185 – see what TB means? ”So you had a bad day–“
(For more on ‘efficient markets’ see today’s commentary which follows. TB)

Total NYSE Volume was steady at 3.58B shares vs 3.64B vs 4.14B vs 2.5B vs 2.73B. Average volume since 9/30 is about 3.6B shares or about 600M more than the 12-month average. Shares traded on the NYSE floor (aka REAL) also declined but remain solid at 776M shares vs 809M vs 877M (is that a trend?) vs 649M shares (lowest since 11/11 and unusual for a monthend) vs 700M vs 846M. For comparison purposes, for the prior 12 months it is a historically weak 718M shares…but since 10/1: 816B shares – including that HUGE 1.22B share day – highest since 9/19, followed by two more 1B plus days leading to options expiry!. The lowest was 11/1’s 619M share session. April 30 – September 30 we had just SEVEN 800M shares…since 10/1: now at 19 – just one in Nov, and FIVE 900M+ days. Two 800M days for Dec.

A/D’s were positive for a second day but… NYSE: +1.8x vs +2x vs -3.5x vs -1.6x vs +1.6x; Nasdaq +1.6x vs +2.1x vs -3.5x vs -2x vs +1.6x. Breadth was better: NYSE +2.4x vs +1.3x vs -3.8x!!! vs -2.4x vs +1.3x; Nasdaq +2.2x vs +2.1x vs -4.7x!!! vs -1.1x vs +2.2x. New 52 Week Highs rose to 328 vs 197 vs 201! vs 515! vs 321 – their range for the year is 39-612!!! New Lows declined but remain elevated at 185 vs 253 vs 447!!! vs 276 vs 84. The 2014 range is 24-1043!!! S&P VIX ranged from 12.21-12.88, before closing at 12.50 -.35 – note not even a ‘13’ print? Just when you thought those ’12’ handles were gone too! This 9 days after hitting a very bearish 15.74, highest since 11/4, and just 3 days ago 14.75! Will we see those bearish extremes that had a high of 31.06 (highest since 11/28/11!!!). The average of the past 12 months is 14.00, with a low of 10.28!…high close of 26.25 on 10/15/14! Friday is the payrolls report and a lot of data remains ahead of it!

U.S. bond market closed upbeat after two VERY WEAK sessions which more than reversing Friday’s STRONG session?!? The recent 12 month low yields (10’s 2.09%; 30’s 2.87%; and long TIP 0.83%), 10’s closed at 2.28% +1/8; 30’s 2.99% +9/16, and the long TIP 0.98% +5/8. Overnight little changed and slightly weaker: 10’s 2.29% -1/16; 30’s 2.99% -1/16; and long TIP 0.98% –.
Libor update: 0.235% 3 mos.; 0.328% 6 mos. – and still near their new record lows! The Fed Funds rate has averaged 0.09% and is currently 0.11-0.13% – a 9-month high. T-Bills: 0.01% one-month, 0.00%! 3 mos 0.12% one year.

Foreign bond yields mostly higher (Benchmark is 10yr): Germany 0.78% +3; UK 2.04% +6; France 1.04% +3; Italy 2.03 +5; Spain 1.88% +6; Portugal 2.80% +4; Greece 7.47% +3 – still an ‘E’ ticket ride! 10/16’s close was 8.54%! – cycle low: 5.42%; Crisis high: 12.57%. Japan: 0.43% –.

Gold had a nearly parallel session following Tuesday’s inside day but don’t foget the prior two sessions which were huge. It closed at $1208.70 +$9.30 – still holding on to Monday’s HUGE ‘key reversal’ that had a high of $1220.40 that almost closed a gap going back to 10/28 ($1226.40), and now only the 3rd time above the 40/50 day since 10/21! 11/7’s low was $1130.40, a new 12-month low!). The last 25 sessions have had prints below $1200 – first time since 12/31/13 Last close above $1300 was on 8/15. 7/17’s session high was $1346.60, highest since March 19th!!! Res/Sup is at $1200 (psych), then the 40 day at $1202, the 50 day $1204, then the 200 day at $1274. The 12-month high is $1392.60 on 3/17, highest high since 9/4/13. 11/7’s low was $1130.40! Overnight little changed at $1206.70 -$2.00. There have now been 9 highs above $1200 since 10/31. Silver still holding in mid-$16’s with a slight new high of $16.68! 12/1’s low was $14.12, more than a five year low.

Crude closed slightly better at $67.38 +.50 , with a 2nd straight ‘inside session’ – this one very narrow. Monday’s range was $69.62-$73.64 – 4 handles – with a low was $63.72 – a new five year plus low (6/2010)! Friday’s session high was $77.83. 10/25’s high was $84.83. There have been 43!!! handles since peaking at $107.73 on June 13th, highest since 9/19/13. The record high of $147.27 was on 9/30/08, the low since on 12/30/11 is $74.95: $93.60 is the midpoint!!! Recent rally high and close are $110.70 and $110.53 respectively. RES at the 40 day ($78.86!), then the 50 day ($81.44!), and lastly the 200 day (95.80!), all increasing their rate of decline! A failure here could take us to $59!!! The recent range is now $63.72-$112.24 since 3/1/12. Overnight it is weaker at $66.44 -.94 – with a low of $66.09. Note that following the financial crisis it traded down to $32.40 on 12/31/08 from a high of $147.27 just three months earlier (-78%!!!).

European equities weaker, Asia strong: UK -0.2% vs -0.3% vs +1.2% vs -0.9% vs -0.2%; France -0.9% vs – vs +0.3% vs –0.3% vs -0.3%; Germany -0.6% vs +0.3% vs -0.2% vs -0.1% vs +0.6%; Japan +0.9% vs +0.3% vs +0.4% vs +0.8% vs +1.2%; Hang Seng +1.7%!!! vs -1%! vs +1.2% vs -2.6%!!! vs -0.1% vs +1.2%; Korea +0.9% vs +0.2% vs – vs -0.8% vs -0.1%; India +0.4% vs – vs -0.4% vs -0.5% vs +0.9%. U.S. equity futures weaker: DOW -17 (range 78); SPX -3.10! (11); NDQ -1.50 (23). U.S. markets opening in line…Transports +45!

Some random thoughts:

(Thanks to all of you who found yesterday’s column on the NY Fed interesting…two labelled the situation ‘sick’ – quite an accomplishment in this day and age, no? TB)

TB just read this in Financial Planning magazine:
“Intuitively, it may seem to make sense that using economic analysis in investing will lead to better results. But intuition is usually wrong when it comes to investing — and so is a lot of economic analysis.In fact, good economic analysis may be the cause of below-average investing performance.
Consider the following example. Economists rarely agree on anything, but back in December 2013, 45 of the 46 economists interviewed by The Wall Street Journal forecast that interest rates would be higher in 2014 — and the 46th predicted that rates would be flat. Overall, they projected an average increase of 0.61 percentage points in the 10-year U.S. Treasury bond. The logic was compelling. The Federal Reserve had announced that it would be tapering quantitative easing. The reduced demand for intermediate and long-term U.S. government bonds would no doubt lead to higher rates.This logic led advisors and investors to lighten up on bonds and shorten their duration. An increase of even 0.61 percentage points in interest rates could cause intermediate- and long-term bonds to fall.

Fast-forward several months. By November, it seemed almost every one of those experts had been wrong, at least so far. The 10-year U.S. Treasury bond had not increased. Rather, it had declined by 0.7 percentage points as of Nov. 10 — even though the Fed followed through on its promise to taper. Bonds have done quite well and the longer the duration, the better the performance.

If you think this is an anomaly, think again. A paper from professors at North Carolina State University found these economists were directionally correct on interest rates far less than half the time.

Specifically, the authors wrote, “Virtually all failed to make six-month-ahead forecasts of the Treasury bill rate, Treasury bond rate and yen-dollar exchange rate that beat a naive random-walk model for accuracy, and many made forecasts significantly less accurate than the random-walk model.”

Surveys showed that going into this year, advisors were indeed reducing bond exposure and keeping bond durations short term. Those strategies failed, for two reasons. First of all, investors confused knowledge with unique knowledge. Markets aren’t stupid; across the board, investors realized that the Fed couldn’t continue buying back bonds indefinitely. When the Federal Reserve announced tapering,that was already priced into the market.

Second, few investors or advisors bothered checking the track record of the top economists they were following. If they had wanted to make portfolio changes based on the investors’ forecasts, logic would have dictated using them as a contrary indicator.

According to the Investment Company Institute, investors pulled $170 billion out of bond funds from June to December of last year, presumably because of their near certainty that rates would rise. Oops.
In a postmortem, it’s easy to see that the herd had already priced in the tapering announcement by the Fed.”

Why is TB reporting this? Well…back in 1972 he went to work for Western Bancorporation whose lead bank was United California Bank and whose economist was Raymond Jallow (under him was a man TB got to know and who went on to become a highly successful investment manager – in bonds: Van Hoisington!).

Each year in the annual report, Jallow would provide a ‘scorecard’ if you will, citing his predictions and whether he was right, wrong, or ‘partially correct’. We used to joke that if he said GDP would increase 2% and it actually declined 2% that would count as ‘partially correct’. \

Remember the jokes about the ‘one-armed’ economist (so he couldn’t say ‘on the other hand’), or the term ceteris parabus (all other things remaining the same), which they never do; or the economist trapped in a hole with three other men. When asked what they should do said, “assume a ladder.”

This brings us to the ‘bond king’, Bill Gross, who blew it and like most of us when proven wrong refused to accept the facts. He had a good run as did a few others in stocks, but all good things must end, and so over the long-run (the long run being our lifetimes). So net out fees and John Bogle’s recommendation to stick with low fee index funds (and a few good ETF’s), rings true. Then of course there were all those ‘beta’ theories, which became part of the ‘efficient market hypothesis’ that our young impressionable Charter Financial Analyst’s have been preached to until it is part of their brain. Does the market really contain all the knowledge on a particular stock? Not hardly, unless those non-economist brokerages and advisors like throwing their money away on financial analysts – yep the ones who are CFA’s who believe (or were brainwashed to believe – but wait, if what they were taught is true why would they choose that as a career?), markets are efficient. In a perfect world, without insider trading, and ‘doctored’ financial reporting, it is…or would be…could be…

Just some food for thought to get your mind off whether the police are blind to race.

We are over the hump with a payrolls Friday looming.

TB

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