The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Bullish sentiment continues to increase as measured by both the weekly II data and a Bloomberg survey. II said Bulls rose to 53.4 from 48.3, the highest since Dec ’07 while Bears fell 1 pt to 15.9, just shy of the lowest since Apr ’87. Bloomberg said bulls on the US market rose to the highest since ’07. What the raging bulls don’t see is that an economic and earnings recovery will not happen in a vacuum and we will have to deal with the reality of higher interest rates and the speed bump or possible road block that it creates. The reaction will be more pronounced the longer the Fed and others keep rates too low. The Shanghai index fell 3% on the heels of China’s tightening steps yesterday and should be a warning. Also, the Fed’s Fisher and Plosser spoke last night and don’t seem to keen on continuing the MBS purchase plan past March and a BoE member questioned whether more asset purchases are needed in light of potentially higher inflation.

Here are some quotes from Plosser and Fisher hinting at some of their concerns with current extraordinary accommodation: “economic slack is neither a necessary nor sufficient condition to ensure low inflation…inflation is a monetary phenomenon,” if we fail to raise rates “well before” unemployment falls “we run the risk of keeping real interest rates too low for too long.” On the possible end to the buying of MBS, “we would risk delaying the return to normal market functioning rather than promoting that return were our sizeable purchases continue.” “Housing market needs to heal on its own.”

ABC confidence fell 6 pts to -47 to a 5 week low led by the Buying Climate component (asks whether its a good time to buy something) which fell to a 10 week low. The MBA said refi’s rose 21.8% but purchases were flattish as the average 30 yr mortgage rate fell 5 bps to 5.13%. The refi jump follows sharp declines around the holidays in the prior 3 weeks.