|
Navarro's Market Rap: October Gloom or Boom?
Rising interest rates, an ongoing oil price shock, a structural shift in the U.S. economy characterized by the offshoring of higher wage jobs, and a burgeoning budget deficit constitute today's reality. In such an environment, only good stock pickers and gutsy short sellers will prosper.
The Week Ahead: An Atypically Meaningless Jobs Report.
The big report of the week will be the jobs report. However, it will be so skewed by Katrina that it will have no meaning for the market – albeit it will contribute to market volatility.
Peter's Portfolio: Shorts and Longs
I've started to build a short position in the cubes which had a slightly up week but continues to deteriorate technically. Will add as conditions warrant….
The White House has finally figured out that bird flu is serious and is going to spend some big bucks on it. My "die rich" picks SVA and CHIR will respond accordingly, with SVA looking increasingly robust. (I added a bit to SVA last week and may add more.)
Looking to add to ARDI this week. Holding ARTX, ASTM, LVT, EWG, and EWJ. Will cut EWG if it goes into the red on my position as its technicals are declining.
|
Hedging Your Bets With Matt Davio: Ex inflation, There is no inflation!
If that title has you confused, than you are probably not a fan of the CPI ex- food and energy and healthcare, occasionally referred to as the core inflation rate. That's the measure some economists have been using to track the rate of inflation. It's a foolish game played by those whose grasp on economic reality is tenuous at best.
Ostensibly, removing the more volatile elements of inflation data points avoids having a single outlying month disrupt data. Some of the more numerically literate of you might note that a simple moving average would do the exact same thing, yet allow any simultaneously rising prices to be revealed for what they are.
For whatever reason, some choose to ignore this approach. Instead, they select the "ex-" methodology of looking at inflation "ex-" inflation. This "ex-" method ignores too many inconvenient facts, i.e., that the CRB Index has been in a strong uptrend since October 2001. Yet despite 4 years of rising prices, the core rate has been remarkably stable. One wonders what the appeal is of such a misleading indicator.
Mind you, this is not the first time the Dismal set has purposefully shifted inflation data downwards. As The Economist reminds us "when oil prices surged in 1973-74, then Fed chairman, Arthur Burns asked the Fed's economists to strip out energy from the consumer-price index (CPI)." This was to get a "less distorted measure of inflation." Unfortunately, they couldn't stop with just oil - food prices were stripped out too, followed by used cars, children's toys, jewelry, housing and so on, until around half the CPI basket was excluded because it was supposedly 'distorted' by exogenous forces."
It is no surprise that those who have been overly reliant on the core rate have been unpleasantly shocked recently. The "ex-" group insisted the Fed would pause; after all, why raise rates, if there is no inflation (not once you back out all the inflationary data). Their distress at the most recent hike is directly proportional to their failure to understand the difference between smoothing a data series to reduce volatility, and simply removing inconvenient data that suggests something one does not like. If that reminds you of the recent shenanigans of the Conference Board with their LEIs, than good - you have been paying attention.
Those who live in a seasonally adjusted, hedonically altered, optimized world have to occasionally confront the unpleasant reality of a universe that doesn't care for their artificial constructs. Ignoring energy - the inflationary data in the CPI - is less than pointless; It shifts the focus away from exactly where it should be: On the part of CPI that has been rapidly increasing in price.
After backing off last week in the wakes of hurricanes Katrina and Rita, government bond yields, looked at through the 5-, 10-, and 30-year yield indices, are again creeping higher. The five-year has formed a large triangle on a long-term 1x3 point & figure chart, while the 10-year and 30-year also have moved to critical technical inflection points.
These inflection points are going to be very important to watch over the next few weeks. For most of the past 16 months rates have remained range-bound; moves toward the top and bottom of the range have stagnated. The difference now is that the chart patterns have tightened into technical formations that typically produce meaningful breakouts (or breakdowns) when completed.
In other words, those who have grown comfortable with the range may be in for a surprise if they expect the past action to continue.
5YR Yield Index (FVX)
The FVX chart shows how crucial the next move on the chart will be. The primary trend for this index is already positive; a move above 42 would suggest the next leg higher is underway.
10YR T-Note Index (TNX)
The TNX longer-term chart remains in a negative trend, but a move above 44 would be an important breakout; a move below 40 would suggest a new leg down is underway.
30YR Yield Index (TYX)
The TYX has been flirting with this 16-month downtrend line since August. A move above 46 would suggest the primary context has changed.
|
