I wrote this earlier last night it has got some serious refrences to anamolies in markets, please read this before my next report, I think you lost it amongst hundreds -'Theory of Mutual Hostage'- Bond and Market
Ahmed- I am very interested with your analogy on bonds- please read my 7161 and a report on Inflation indicators however I want to know more about your bearish views on bonds- I have decided to open up my heart give every thing I have may be it will help few- I assure you as time passes you all will ask me about NEKKEI FTSE CAC40 DAX and I will never stop telling you nice stories until you fall asleep!
On inflation front there is lot of tinder around which in coming week can unsettle the markets the problem I am trying to address is that inflationary interpretations lead to a bond sell off i.e. higher yields normally such a sell off should take market through the support levels but the moment we see sympathetic selling in the equity markets the genuine correction which bonds are undergoing gets overlooked this huge mass of 'coward capital' looking for a home finds the only refuge in case of a equity sell- off in equities now I hope you are with me the problem begins from here the moment money start going into bonds the bonds rally some foolish people think this is a genuine rally but this is flight of coward capital finding its first safe haven- now with rising bond yields the equity pundits take heart in thinking bravo the market fundamentals are great bonds are rallying we have no other way to go but up- so S&P futures sold short are covered by these funny fund managers- this is the fundamental cause of gyrations in the market- we have a catch 22 situation here- if bonds sell markets sell but when markets sell bonds rally so markets rally because bonds are rallying- we have in traffic 'Sicilian deadlock' this is a kind of traffic jam where none of the cars can move and ease the jam- here this market deadlock can only be broken if:
NAPM Journal of Inflation index and Employment cost index confirms stance that wage inflation and demand pull inflation is non-existant. In such a scenerio I think our yields should head to 6% in 12 months and market valuations will justify new highs.
However, until above data finally seals 'inflation's fate' we will continue with these major unsettling movements in the markets, if you have a Reuters and you pull weekly S&P chart try to join the peaks you will intersect the Y-axis at
990 , a point where every technician is looking at. I have absolutely no bones about it that this fear of market valuation is clouding everyone's judgement we need to recover from this abyss, markets are forward looking indicators for economy in general and as such are sensitive to interest rates but if interest rates and markets have become hostage of each other where does it leaves a pure theoritician or an academic chartist who wants to read the market direction- charts will not dictate the future of this market because the basic relationships are skewed- in this hostage situation I will do what I did on Friday- make some money playing the market-
If TA gives me an up direction I will thru my analysis of 'Mutual Hostage ' theory evolve a third way- the window of opportunity opens up every now and then with this anamoly in sight I take good advantage - these markets follow no fundamentals they follow fears and sentiments of cheeky Fund Mangers who will sell futures big time on a non-existant threat getting whipsawed every day, anyone who understands composition of cap markets and flow of global capital will realize that markets fear do have a underlying pattern and I do have a TA of Managers fear-
I do it all the time even looking at modes of Jack Welch or Gates or Groove a day before earnings, where did they dine how were they acting- this is TA of CEO's which is a important ingredient of S&P trader..
This is sentiment and fear analogy of markets and will continue if you provoke me further or if it makes any sense to you may be all this unconventional approach is pure non-sense but it helps me pick turn arounds perfectly=I put this theory to test on Friday during the course of that eventful day we made 7 trades not one being on the losing side and by the way I play with stops as I don't have this luxury of carrying a position on futures beyond...some points. I know it I will apply it again whenever fundamental anamoly will exist the markets and bonds have to develop a honest relationship so far they are going thru a rough patch, whenever this happens beans are spilled- once this anamoly is corrected we go straight into a bull or a ------market where we will need lot of TA as normalcy will return.
Inflation- How real a threat?
If yields goes down to 6% DOW moves upto8950- 9270 but question is the yields? If the inflation is headed lower I will see the gap between Real and Nominal yield to narrow, already the gap btw Real and Nominal is highest in US second only to UK all other OECD countries have a much smaller gap, US and UK larger gaps are reflective of future inflationary undercurrents, you take this out of the equation and you may see yields at 5.75% because the premium now being charged will have to narrow. I think Three numbers are the key and you will see increased volatilty always before these three numbers-
PPI is not an advance indicator of inflation it is a lagging indicator so will notice that last March when FED tightened PPI was falling, so I like AG approach and look for following numbers:
1: The employment cost index- rose .8% after a rise of .6% in first quarter, market is not priced for any further surprises on this critical index although wage inflation is not a threat but some of thse numbers can bring a surprise.
2: US NAPM prices INDEX has a close relationship with Fed funds notice sice 1994 NAPM increases from 60 to 85 were matched by 6 Fed funds increase likewise on a downward NAPM from 85 to 40 we saw March 95 andNov- Jan 95 96 to rate cuts I think a NAPM below 55 will be extremely bullish and NAPM above 60 will for certain warrant a rate hike, I heard AG makes his decisions sitting in his bath tub and I assure you that he will notch it higher within 2 months if we get NAPM HIGHER THAN 59-60.
3: One other number you need to watch carefully is the rising NAPM with a sharp upward move in the journal of Commerce Inflation Gauge I need to see a reversal of this gauge otherwise last time Fed hike came on heels of this number around 108-9, now if we see this trend continuing we are going to be hit by a rate hike.
I think my job is to look forward we are trading every day with an upward bias however markets discount forward activity therefore I keep my horizon little extended I felt that it may for some taxing thing but I think in a years time you all will know and appreciate that we need to look forward n the stock market, I am trying to highlight out of volumes of numbers significance of just three and if you find three above heading down I rest assure you that a strong non-inflationary growth can bring miracles on the upside however I would like to see the non-farm employment to point towards a solid growth, declining numbers with rising unemployment will not be good for corporate profits raise the spectre of deflation. Some other time- sorry for taking so much of your time JT- but I love to talk and you are productively provocative bavy- take care and ask your broker
why does he feel rates are headind down even G's broker think we are heading to 9000 but I think you all will be pleased to atleast watch that trend if we know what actually is fanning it! |
