Posts filed under “Think Tank”

Who is Feeling Smart These Days?

Good Evening: U.S. stocks rose once again on Wednesday, extending what has become a rather remarkable equity rally. Taken in context with another down day for Treasurys and the U.S. dollar (and another up day for commodities), market participants should be forgiven for feeling Yogi Berra’s sense of deja vu all over again. A slate of strong economic releases were in part behind today’s ascent in share prices, with readings for the CPI, industrial production, capacity utilization, and the housing market index all coming in at, or well ahead of, consensus expectations. A report of very weak international capital flows into the U.S. (the TIC report) was largely shrugged off. What has been harder to overlook is the continuing strength of the U.S. stock market. It has left bulls and bears alike feeling confused. Very few investors seem to be feeling smart these days.

I will dispense with the usual recap of the day’s market action, offering instead the following summary. Most of the major averages went steadily higher all day and finished with gains of between 1% and 2%, though the Dow Transports were the exception by finishing flat. Treasury yields rose to challenge their September peaks, the dollar took another header, and commodities almost outdid stocks when the CRB index posted a gain approaching 2%.

“Never confuse brains with a bull market” is one of Wall Street’s oldest pieces of advice for investors. It teaches us to not feel too smug or smart about the levitation in one’s portfolio when the major averages, too, are rising. If what has been transpiring at the corner of Wall and Broad streets since March is indeed a bull market, then the usual celebratory cockiness is missing. Of the seeming lack of joy over this latest rally, one of my readers relayed the following impression of her recent trip to New York : “Even the ones who are making money aren’t happy”, she said. And frustrating as this essentially one way trip higher in stocks has been for the bulls (the under-invested ones, anyway), it has been more painful than a declawing for the bears.

With so few people feeling smart, is there any identifiable group exchanging high fives these days? Next week’s FOMC meeting might be the site of at least a few quiet ones. When the governors gather inside the Eccles building, one or two will no doubt smile when the Lehman anniversary and the August economic data come up for discussion. Catastrophe apparently averted, the Fed will be tempted to take a few bows. After all, and at the risk of being compared to President Bush’s 2003 carrier landing beneath the “Mission Accomplished” banner, didn’t Chairman Bernanke’s “the recession is likely over” statement yesterday betray at least some sense of achievement? The mood around the conference table will turn somber, however, when the FOMC gets around to deliberating about an exit strategy. There might even be a lonely voice asking whether or not the Fed should soon start the process of draining the pool of liquidity in which the global capital markets have been swimming for most of 2009.

Student and teacher of history both, Chairman Bernanke will probably cut short any “it’s time to take away the punchbowl” discussion by citing a similar policy mistake made during the Great Depression. Mr. Bernanke might not directly quote Jim Grant’s excellent book, “Mr. Market Miscalculates — The Bubble Years and Beyond”, but it would be appropriate if he did so. “(I)n 1935, it (the Fed) was given the power to set reserve requirements. It presently doubled reserve requirements, thereby entering a strong claim of paternity for the nasty 1937-38 recession…” (Page 261). Removing the stimulus too soon and risking a relapse in the economy is one of the many lessons of the Great Depression Chairman Bernanke is likely determined not to repeat. Remember, too, that his re-nomination has yet to receive approval in the Senate.

Even so, Mr. Bernanke might allow some mild exit strategy language to be inserted into next week’s statement. Even if the risk of a future inflation is the last thing on his mind, he may still not want to risk losing the bond market just now. Thus, any talk about removing monetary stimulus will probably be just that — talk. Mr. Bernanke will see to it that money printing will be with us until the bond market grounds his fleet of helicopters. Until that day comes, stocks could continue to be kited higher on the winds of easy money. Maybe, just maybe, Mr. Market came to this conclusion when quantitative easing measures were announced by the Bernanke Fed back in March. If so, he’s probably one of the few who feels smart these days.

– Jack McHugh

U.S. Markets Wrap: Stocks, Commodities Gain on Economic Outlook
U.S. Economy: Output, Prices Point to Growth Without Inflation
Buffett Says Economy Has ‘Hit a Plateau at Bottom’
Bernanke May Accept Slow Recovery to Fight Inflation

Category: Markets, Think Tank

NAHB housing and tax credit impact

The Nat’l Assoc of Home Builders index was 19, in line with expectations but is up 1 point from August. It’s now at the highest level since May ’08 but is still well below the magic level of 50 which is the breakeven between those that say things are better and those that say worse….Read More

Category: MacroNotes


With another record high in gold and the slightly higher than expected headline CPI reading, the implied inflation rate in the 5 year TIPS has risen 6 bps today to 1.55%, the highest level in 3 months. Expectations in the 10 yr TIPS are up 3 bps to 1.86%, the most since August 21st. One…Read More

Category: MacroNotes

> Long-time readers know that for years we have inveighed that there is a huge, historic disconnect between the stock market and the economy due to funny money. Easy Al and now Benito have transformed the stock market and other markets from gauges of the economy to generators of economic activity via their deployment as…Read More

Category: Think Tank

More economic data

August Industrial Production rose .8%, .2% more than expected and July was revised up a strong .5% to a gain of 1%. Capacity Utilization in response rose to 69.6% from 69% and was .6% more than expected. In terms of the output gap argument keeping a lid on inflation, 80% is the 30 year average….Read More

Category: MacroNotes


August CPI rose .4% headline, (.1% more than the estimates) but fell y/o/y fell 1.5% (.2% higher than expected). The 9.1% m/o/m gain in gasoline prices was the main contributor. Food prices rose .1%. Ex food and fuel, prices rose .1% m/o/m, in line with estimates and is up 1.4% y/o/y. Owners Equivalent rent, 24%…Read More

Category: MacroNotes

When does asset price inflation lead to consumer price inflation?

With asset price inflation the unofficial policy of our Federal Reserve in driving economic growth over the past 11 years and particularly over the past two years, the question of late has been when does the easy money lead to consumer price inflation. Aug CPI is expected to rise .3% m/o/m but fall 1.7% y/o/y…Read More

Category: MacroNotes

Commodity Futures Trading Commission (CFTC)

Michael Martin is a proprietary commodity trader. He is a commodity instructor for the CFA Institute and a frequent lecturer on risk management.  Until September 2008 he was an Associate Editor at Trader Monthly magazine.  He blogs at and at

Victor Sperandeo is professional trader also known as Trader Vic —  is generally considered an expert on commodities (particularly in the Energy and Metals sectors), where he has earned a reputation for profitably trading in declining markets. His market crash prediction during the September 1987 Barron’s interview earned him widespread recognition of his understanding of the financial markets.


Sitting On One’s Hands

There are several things that the Commodity Futures Trading Commission (CFTC) will be considering as they convene hearings. Hopefully they will hear well-researched, and well-thought out opinions, unlike that of Michael Masters – who’s testimony was slammed equally by the left and the right by the likes of Nobel Laureate Paul Krugman and Commodity trader Jim Rogers. Among the issues that the CFTC is looking at are transparency in the markets and the position reporting limits where they are not currently any Federal guidelines. A third issue is the stratification of the COT — the commitment of traders — which characterizes how the market participants are biased in the marketplace. Ultimately, these make for good talking points, however, regulation in these areas will not stamp out speculation nor insure Americans against high commodity prices.

Position Limits

That commodity futures contracts have position limits is not a new concept. The various exchanges set position limits, except for Agriculture futures which are set (Federally) by the CFTC. Each commodity has its own position limit and they tend to be very specific. NYMEX Crude oil, for example, has the position limit of 10,000 net futures in any one month and 20,000 net futures contracts for all months combined. You are limited to “only” 3,000 contracts in the last 3 days of the spot month, including any concurrent Call or Put Option positions on the same commodity. The question before the CFTC is how to account for the Over the Counter (OTC) market in aggregating position sizes. Also, the Intercontinental Exchange (the ICE), has evolved substantially since trading has become much more electronic. The ICE offers “look-alike” futures which are cash-settled and no physical commodity is ever involved by definition. The position limits for the ICE Crude Oil Futures are exactly the same as those set by the NYMEX on its crude oil contract. These are two different contracts on two different exchanges and their limits should be separate.

If Victor decides to sell 5,000 NYMEX crude oil contracts and Mike is buying 5,000 NYMEX crude oil contracts at the same time, there is no effect on crude oil itself. Neither of us is creating nor producing the physical oil – we are trading against one another. We are not impacting the consumer, unless the consumer happens to be a speculator and is taking part of the position. What we are doing, however, is providing valuable information to the marketplace on the outlook for Crude Oil. We already abide by the reporting levels. Further transparency will not annul volatility in commodity futures trading. Uncertainty causes volatility. Hedgers, real hedgers, are hedged oftentimes to the back of the board and they use several techniques beyond futures contracts.

Commodity investors, also called Indexers, invest in commodities for the long-term to assuage the effect of inflation on their traditional investments and “paper assets,” such as stocks and bonds. Through passive investments such as the US Oil Fund, LP (ticker:USO) discussed below, or through the asset class known as Managed Futures, they seek diversification along their investment frontier to enhance their returns while reducing risk. These indexers, which have billions and billions under management, are the large pensions (and in some cases Endowments) that have Defined Benefit plans that they are legally bound to pay out of to plan beneficiaries – retirees – in the future. It has been alleged that such indexers, due to their sheer size, are driving up the price of commodities. So far, there has been no evidence of fact to this regard. Regulating pensions and endowments out of the market or to the point where their participation would be meaningless, would be a great disservice to them and frankly, discriminatory because of their size. Such regulatory banishment would likely come back to haunt lawmakers and tax payers because if there was a shortfall in corpus that is due to be paid out, it would have to be made up. This would be a drama known as Social Security, Part II.

Read More

Category: Commodities, Regulation, Think Tank

Everyone Has a Stock Market Forecast

Good Evening: This may sound like a recording, but stocks overcame another early dip to again finish higher on Tuesday. At least the averages had some economic data behind this rally, with retail sales and the Empire Manufacturing survey both coming in well ahead of expectations. Then again, PPI rose at a stagflationary pace, and…Read More

Category: Markets, Think Tank

Penury, self-imposed or inflicted, the new normal?

One of my favorite sources of information is The Liscio Report by Philippa Dunne & Doug Henwood. Among other things, each month they survey all the states about tax revenues, expenses and then give us the results in a very pithy fashion. No one pays taxes unless they have to, and thus taxes tell us…Read More

Category: Think Tank