Apr

19

There were all sorts of records in stocks and bonds last week with stocks having their sixth best week in history, and bonds having their 10th worst week. Strangely, only once before have stocks moved up and bonds down this much, the week of March 21 2003, when bonds were down 4.5 points and stocks up 54. Because of the small number of observations the expectations next week for the events singly or in combination are not meaningful.

In retrospect, this was a natural result of the increased liquidity provided by the Central Banks. They were able to get the stock market up, but in the process they raised the specter of inflation again and commodities went through the roof and interest rates had a climactic increase. Thus, the bond vigilantes came to the fore again and forced the Fed to trot out their higher ups to say they are very concerned now about inflation, this coming of course after the 3% rally in stocks so as not to hurt the market too much.

The key event in the climactic moves had to be the big brokerage house bail out. It always seems that the destruction of a big institution is the key to renewed success in the market. It was that way with the big commodities firm, the big Nobel Prize fixed-income fund, and also the big banks and brokerages of the past including Barings in two events separated by 100 years.

The epyphytes like the orchids find it much easier to get to the light after the leaves of a tree have fallen, and they can grow quickly since they don't have to waste their energy in growing support structures of their own . Think of the countless businesses and opportunities for making money that will come now that all the weak assets have been, or are in the process of being, withdrawn from the asset pool.

The same thing happens when Walmart enters a town. A few slow-moving competitors like Kmart might find their business depressed, and the local hardware store might find that many of its customers prefer the lower prices Walmart offers. But these lower prices lead to increased spending and new businesses arise that quickly fill the vacuum.

Such can be expected in the next several years in the stock market, until the weight of the epiphytes is so large that the limb breaks.

Bill Craft adds:

Spanish Moss, a southern epiphyte enjoys a shaded environment whilst dangling from trees within the shaded canopy. Tillandsia usneoides are bromeliads, related to Pineapple.

Contemplating the dangling plumes of graybeard(s) on a recent trip, I could see the colony living off structure created by tall, towering trees intersecting the mists that provide life giving nutrients.

The support and sustenance offered here rhymes.

Steve Ellison expands:

A corollary might be that, when interest rates rise and credit is restricted, and a big institution has not yet failed, markets will behave in very unexpected ways in order to locate the vulnerable institutions and force them to liquidate at distress prices. As Damon Runyon said, "One of these days in your travels, a guy is going to come up to you and show you a nice brand-new deck of cards on which the seal is not yet broken, and this guy is going to offer to bet you that he can make the Jack of Spades jump out of the deck and squirt cider in your ear. But, son, do not bet this man, for as sure as you are standing there, you are going to end up with an earful of cider."

As an example, Goldman Sachs said that the results of pairs trades in August 2007 were 25 standard deviations away from historical averages.  The market was doing its best to find someone vulnerable.

Stefan Jovanovich objects:

The line quoted is not from Damon Runyan's Idyll of Miss Sarah Brown but from the screenplay for the movie of Guys and Dolls. The credit should go to Jo Swerling and Abe Burrows who wrote the book for the musical and Joseph L. Mankiewicz and Ben Hecht who reworked the musical into a movie.

Kim Zussman drifts off subject:

Here are some fortune cookies appropriate to these difficult times:

You can't know what you were trying to find until seeing it in hindsight

The thing you are looking for won't occur until you are so discouraged that you stop looking

The obvious thing is only right if you decide it is too obvious to be right

The cynical interpretation is only true when you don't act on it

Wealth and philanderosophy are the secular cousins of immortality


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3 Comments so far

  1. Leonardo's Shadow on April 20, 2008 12:15 pm

    Commodities have temporarily peaked, according to the ETF charts. There was something of a climax run in the oil stocks. Expect a pull-back for a few weeks. That’s my reading.

  2. George Parkanyi on April 20, 2008 3:43 pm

    Speaking of fortune-cookies … In our consulting company I’m President and my wife is Vice-President. She keeps getting fortune cookies saying “You will soon be promoted.”

    Am I right to be wondering what that means? :)

    Cheers,
    GP

  3. George Parkanyi on April 20, 2008 3:57 pm

    Shadow of Leonardo,

    That would work for me … In my allocation portfolio, through the normal re-allocation signals, I’ve been accumulating gold, natural gas, oil, and grains short ETFs (the Horizons BetaPro 2x leveraged ones in Canada). They make up about 14% of the total portfolio right now. Not a big deal if I have to pick up a bit more before they correct - I think we’re in for some nice volatility both ways over the summer. I also have some offsets in long 2x grains and long 2x natural gas.

    (The thing I like about these ETFs is that you can use them as another asset class, with volatility and non-correlation benefits.)

    Cheers,
    George

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