“FA: guessing into mind of ‘animals’ and Fed”
“In short term, there are no fundamentals”, and TA would love a trading session like today. With basically no new input from data, information and FA side, what dominates today’s market movement is last night’s sunny Orient and M&A this morning. Obviously “animal spirits” are going around with some steam, inducing a lot of short-covering I guess, particularly for those shorted since 031307. 10Y T yield index at 4.57%, kind of recovered back above its 031207 level of 4.53%, turning a lot of Gross’s bond followers into red, at least for now.
Dow’s volume is about on average, and the index gain is far below 1.7%, required by IBD for a valid “follow through”.
Where Dow would go from here? TA would point at next resistance or support, and next after next. IBD will tell you to wait on the sideline, until you see a valid “following through”. They are all very honest: that’s as much as they know and can tell you.
How about FA?
FA is still a guess, like TA. Instead of guessing on greed and fear, FA guesses financial/economic data and information about a company, an industry, an economy, and many economies, thanks to the arising of Chinese-style capitalist economy and it’s alike.
Speaking of Chinese-style capitalist economy, I somehow feel more bullish about it and recommend CAF, one of my long-term holdings.
If nothing else, my bullishness is kind of justified by FA, which by the way, can guesses a lot of better about Chinese capitalist economy as managed by CCP, in its current context.
FA is lot of limited in its value when guessing about
So, “FA: guessing into mind of ‘animals’ and Fed”
is my short description of FA, “animal” being market participants as named by Keynes, of both bears and bulls.
Now let’s peek into their minds.
Bulls:
2.4 percent annual rate this quarter, and accelerate to 3 percent by year's end (Bloomberg.com)
Bears:
Pimco thinks
Inflation
Bears and bulls seem not too far away from each other, CPI around 2.7%.
Subprime
Bulls:
5% of subprime may fall delinquent, not much spreading out into other parts of economy
Bears
20% of subprime may fall delinquent and the problem will spread into other parts of economy.
Earnings
Bulls
Briefings.com and reuters.com
Earnings estimates for the first quarter have drifted down from 8% two months ago, to 6% one month ago, to 5% or less today.
Second and third quarter estimates have dropped from an average 7% for the two quarters to 5% over the same time period.
“For the first time in 14 quarters, we could see year-over-year percentage profit growth rate for the S&P 500 universe in the range of 5 to 7 percent.
Overall
Bulls think goldilocks is still in the cards, with
Stocks in the S&P 500 index traded at an average 16.9 times current earnings. below the average price-earnings ratio of 21.9 since the four-year rally began in October 2002.
Bears think more of a recession if not a stagnation, with a Fed rate cut quite possible but may not helpful, and they like front end of the yield curve for now.
Fed
I guess Fed is somehow confident and comfortable with US GDP growth, but still very uncomfortable with inflation and excess liquidity in the system.
GDP
No data about Fed’s comfort zone.
Inflation
CPI of 2.7%, above Fed’s 1-2% presumed comfort zone
Inflation potentials
Capacity utilization rate
Overall capacity utilization in February increased to 82.0 percent from 81.4 percent in January, with historical average being 81%.
Rate of unemployment minus the rate of nominal annual wage growth: if it is not greater than 50 base points, it will be out of Fed’s “comfort gap”.
Unemployment rate as of 022007: 4.5%
Hourly earnings rose 0.4% in February. That is a bit stronger than expected, and puts the year-over-year increase at 4.1%.
So, either too many Joes are at work or Joes earns too much, in terms of inflation potential threat.
Productivity growth
Productivity growth, slowed to 2.1% over 2005 and 1.4% over 2006, although possibly due to cyclical factors, while trend productivity growth is roughly 2½%.
The productivity deceleration has contributed to acceleration in unit labour costs of 3.4% over the past year. (Morgan Stanley)
Excess liquidity
Still too much left in the system from last Fed’s ease, and “animals” particularly bulls have drunken too much of it.
Fed wants to keep substantial amount of “crack” in Fed’s hand and away from somehow already overdosed animals, in case Fed has to really “helicopter” crack out from sky when “Japanese Deflation” invades.
With US economy cruising in a social-economic structure totally different from that of Chinese-style capitalist economy, Fed has to co-pilot the ship with a bunch of “animals” in bond, equity, and commodity and currency market.
To make things worse, both of the two pilots have to guess each other’s guesses on the economy, and communicate in a non-communicative way.
So, what FA can do except guessing all these guesses?
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