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Into Thinner Air
Last Update: 08-Jun-09 08:16 ET
http://www.briefing.com/GeneralCont...me=Investor&ArticleId=NS20090608081637PageOne
Green shoots are everywhere -- or so it would seem based on the market's bullish bias that has been plainly evident in rising stock prices, rising commodity prices, and rising Treasury yields. The question is, do those green shoots have roots?
Anyone familiar with the parable of the sower knows that seeds that fall on rocky ground where there isn't much soil will soon spring up, but eventually get scorched when the sun rises and will wither away, while seeds that fall on good soil will bring forth grain, some a hundredfold, some sixty, and some thirty.
The prevailing view now is that the green shoots are springing from good soil. That thinking has brought forth a 41% gain for the S&P 500 since the March low.
Still, we couldn't help but wonder in the latest week, with the market rallying in the wake of a GM bankruptcy filing and the report that real PCE -- the driver of GDP -- declined -0.1% in April, whether the market might not just be looking for green shoots, but might also be starting to smoke them, too, when it finds them.
When everyone is focused on one thing, though, everyone will see the same thing. To that end, the market has been locked in to thinking about what's next on a linear recovery path, as opposed to thinking what if the recovery path is obstructed by a roadblock or two... or three, or four.
Accordingly, the rise in commodity prices is only being interpreted today as a function of increased demand that is going to coincide with a pickup in the global economy. The rise in Treasury yields is only being seen as an unwinding of the risk aversion trade and a tactical reallocation into stocks as the recovery view predominates.
What if, though, commodity inflation is ahead of its time and simply brings higher prices -- before a genuine pickup in demand -- that taxes the consumer further? What if rising Treasury yields choke off the mortgage refinancing boom and curtail home purchase activity further because they lessen the affordability factor?
What if unemployment continues to increase, as it most likely will, and feeds a further deterioration in credit quality that forestalls the housing recovery and crimps banks' profitability? What if the inevitable inventory restocking phase is just a restocking phase to meet base level demand as opposed to a genuine rebuilding phase to meet a sustained pickup in aggregate demand?
What if the deficit can't be tamed like the Obama Administration thinks it can? The spike in the unemployment rate to 9.4% in May brought the 2009 average unemployment rate to 8.48%, which is above the 8.1% average factored in the White House deficit projection for FY09.
There are any number of "what if" roadblocks out there. They may come to fruition or they may not. Our concern right now isn't so much that we are right or wrong in identifying the roadblocks, as it is that the market doesn't even seem to be entertaining the idea that it could encounter such roadblocks.
This suggests to us that the complacency factor has moved from base camp up to a higher altitude where the air is thinner.
Naturally, we've seen a rise in bullish investor advisor sentiment readings during this rally. At 47.6%, bullish sentiment is at its highest level since early January, or just before the unnerving first quarter sell off.
Conditions are better today than they were then, so we're not suggesting any type of similar action, but it does raise a caution flag as to how much further the market can extend the green shoots rally that blossomed in the spring but is now moving into the summer months when the sun can be scorching.
We hate sounding like a broken record, but when you have a view, you need to stick to it when you haven't seen compelling evidence to change it. We continue to envision a range-bound trade for the S&P (825-1000) during the summer months and would be looking to lighten up on positions that have made outsized moves, or at least working to insure them, while maintaining core positions.
As of this posting, the S&P futures are indicating the market will open the session with a loss of about 0.9%.
--Patrick J. O'Hare, Briefing.com
Last Update: 08-Jun-09 08:16 ET
http://www.briefing.com/GeneralCont...me=Investor&ArticleId=NS20090608081637PageOne
Green shoots are everywhere -- or so it would seem based on the market's bullish bias that has been plainly evident in rising stock prices, rising commodity prices, and rising Treasury yields. The question is, do those green shoots have roots?
Anyone familiar with the parable of the sower knows that seeds that fall on rocky ground where there isn't much soil will soon spring up, but eventually get scorched when the sun rises and will wither away, while seeds that fall on good soil will bring forth grain, some a hundredfold, some sixty, and some thirty.
The prevailing view now is that the green shoots are springing from good soil. That thinking has brought forth a 41% gain for the S&P 500 since the March low.
Still, we couldn't help but wonder in the latest week, with the market rallying in the wake of a GM bankruptcy filing and the report that real PCE -- the driver of GDP -- declined -0.1% in April, whether the market might not just be looking for green shoots, but might also be starting to smoke them, too, when it finds them.
When everyone is focused on one thing, though, everyone will see the same thing. To that end, the market has been locked in to thinking about what's next on a linear recovery path, as opposed to thinking what if the recovery path is obstructed by a roadblock or two... or three, or four.
Accordingly, the rise in commodity prices is only being interpreted today as a function of increased demand that is going to coincide with a pickup in the global economy. The rise in Treasury yields is only being seen as an unwinding of the risk aversion trade and a tactical reallocation into stocks as the recovery view predominates.
What if, though, commodity inflation is ahead of its time and simply brings higher prices -- before a genuine pickup in demand -- that taxes the consumer further? What if rising Treasury yields choke off the mortgage refinancing boom and curtail home purchase activity further because they lessen the affordability factor?
What if unemployment continues to increase, as it most likely will, and feeds a further deterioration in credit quality that forestalls the housing recovery and crimps banks' profitability? What if the inevitable inventory restocking phase is just a restocking phase to meet base level demand as opposed to a genuine rebuilding phase to meet a sustained pickup in aggregate demand?
What if the deficit can't be tamed like the Obama Administration thinks it can? The spike in the unemployment rate to 9.4% in May brought the 2009 average unemployment rate to 8.48%, which is above the 8.1% average factored in the White House deficit projection for FY09.
There are any number of "what if" roadblocks out there. They may come to fruition or they may not. Our concern right now isn't so much that we are right or wrong in identifying the roadblocks, as it is that the market doesn't even seem to be entertaining the idea that it could encounter such roadblocks.
This suggests to us that the complacency factor has moved from base camp up to a higher altitude where the air is thinner.
Naturally, we've seen a rise in bullish investor advisor sentiment readings during this rally. At 47.6%, bullish sentiment is at its highest level since early January, or just before the unnerving first quarter sell off.
Conditions are better today than they were then, so we're not suggesting any type of similar action, but it does raise a caution flag as to how much further the market can extend the green shoots rally that blossomed in the spring but is now moving into the summer months when the sun can be scorching.
We hate sounding like a broken record, but when you have a view, you need to stick to it when you haven't seen compelling evidence to change it. We continue to envision a range-bound trade for the S&P (825-1000) during the summer months and would be looking to lighten up on positions that have made outsized moves, or at least working to insure them, while maintaining core positions.
As of this posting, the S&P futures are indicating the market will open the session with a loss of about 0.9%.
--Patrick J. O'Hare, Briefing.com
