The weekend’s terror warnings raise certainly rattled the futures markets. Traders should be asking themselves: How much of a terror premium has already been discounted by the markets?
This was the first increase in the terror threat assessment to Code Orange since December 2003, when the warning level was similarly moved to Orange from Yellow (It was dropped 3 weeks later back to Yellow on January 9, 2004).
Over the past few months, there have been numerous “indefinite” warnings. While some observers have noted the politically suspicious timing of these rather vague admonitions, there was no such chatter this time around. The DHS has provided specific and credible warnings based upon a high value capture about a potential attack.
The market’s response today confirms last week’s action: Despite rising oil prices, terrorist bombings, soft GDP number, and a Democratic convention that was generally perceived as a success, the markets managed to make progress, for the first week in seven.
This confirms our prior observations: Investors should be much less concerned with headline news, and far more focused upon the long-term health of the economic expansion. We find an emphasis on trend, sentiment, valuation and monetary policy allows an X-Ray of the market’s health. Indeed, day-to-day announcements are often a distraction as to what is lurking beneath the latest headlines. That is the bigger picture you want to focus on.
So what does that data reveal? While the Trend has been negative since June 30th, it has since reversed and is making a counter move. Although Interest rates are likely to rise over the next few years, Monetary policy – both in terms of rates and Money Supply – remains incredibly accommodative. Sentiment has reached a series of extremes; The most recent investor attitude can best be described as indifferent. And Valuation, at least according to the so-called Fed Model, remains relatively attractive.
All this suggests that the potential reversal we mentioned on July 22, 2004 is starting to occur. That it is does despite a series of truly awful headlines just goes to prove the point: The Markets progress according to their own internal rhythm, and ignores most of what seems to occupy our daily lives.
Interesting observations from the WSJ this weekend:
“The market has a problem with the possibility of a Democrat winning, but doesn’t seem to have a problem with the reality of a Democratic president,” says Tom Gallagher, an analyst at economic-research firm International Strategy & Investment in Washington, D.C. Mr. Gallagher also notes that the market tends to do better under Democratic presidents than under Republicans.”
The article (see link below) is chock full of other counter-intuitive observations. Consider, for rexample . . .
Fascinating story in today’s Times regarding the drop in Americans’ incomes. The surprising culprit? “Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid.”
graphic courtesy of New York Times
This two year consecutive drop, like the tech bubble that preceded it, is unprecedented in post war America:
“The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows.
The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent.
Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002, according to the new I.R.S. data.”
That is some nasty data. While we all have anecdotal tales as to how the public gets impacted by economic recessions, its certainly stark when you see it in black and white.