Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross and Chief Executive Officer Mohamed El-Erian, talk about the European sovereign-debt crisis and its impact on the U.S. economy and the role of Germany in resolving the turmoil. Despite having underperformed for a short time, when these gentlemen speak, one should listen. Video with the world’s biggest bond managers.
What’s the focus of investors in this market? The stock market has been living it’s own dream, while many of the credit markets imply a slightly different picture of the Economy. Today we got the Spanish rates trading above the 6% level again. Italian rates are also spiking higher again, and we expect the 7% level to be breached shortly. Irrespective of what you think about the market here, people have clearly woken up to that yields do matter.
Guest post by Macro Story.
I came across an interesting way of looking at price action as a sign of strength or weakness in the overall indices. It’s simply another way of looking for divergences or a shift in momentum that often precedes changes in market direction.
When I study various charts the October 4 move in my eyes looks weaker with each passing day. More and more asset classes are breaking down from bonds to foreign currency to commodities.
The most basic reason I question this move as a true leg higher is the simple fact it never tested the bottom. Look back at all major bottoms and the market gives longs and shorts 2-3 opportunities to adjust. This move gave one. It never tested the bottom for confirmation.
10 Year Vs SPX
This chart takes TNX a proxy for 10 year yield as a ratio with the SPX. Rational being both are correlated and confirmation of a move regardless of direction is supported by both. I then take that ratio and compare it to the SPX. Notice the divergence that began on October 11.
Quick market update, while we learn that Buffet has been loading up on IBM, Wells Fargo and other “long term” positions. Markets reversed sharply after this mornings initial gap open. Europe is under pressure yet again, although volumes are rather muted. The Italian situation is not fixed. As we have been warning over the weeks, next up should be Spain. With the 10 year yield just crossing the magic 6% level, expect renewed Euro Debt Jitters. Below short term levels of Stoxx 50 and the ES futures.
Between 1971 and 1984, Kahneman and Tversky had published a series of quirky papers exploring the ways human judgment may be distorted when we are making decisions in conditions of uncertainty. When we are trying to guess which 18-year-old baseball prospect would become a big-league all-star, for example. To a reader who is neither psychologist nor economist (i.e., me), these papers are not easy going, though I am told that compared with other academic papers in their field they are high literature. Still, they are not so much written as constructed, block by block. The moment the psychologists uncover some new kink in the human mind, they bestow a strange and forbidding name on it (“the availability heuristic”). In their most cited paper, cryptically titled “Prospect Theory,” they convinced a lot of people that human beings are best understood as being risk-averse when making a decision that offers hope of a gain but risk-seeking when making a decision that will lead to a certain loss. In a stroke they provided a framework to understand all sorts of human behavior that economists, athletic coaches, and other “experts” have trouble explaining: why people who play the lottery also buy insurance; why people are less likely to sell their houses and their stock portfolios in falling markets; why, most sensationally, professional golfers become better putters when they’re trying to save par (avoid losing a stroke) than when they’re trying to make a birdie (and gain a stroke).
Full must read article, for any investors or trader, click here.
….and the reaction to Italy’s solved problems is a slight risk off. After the initial short covering, futures have traded down and filled this morning’s gap. As we have pushed higher over the past days, the SPX has once again reached the 200 day moving average. The market is “confusing” many at these levels, as it is not breaking up, nor does it want to break below the lows. With Christmas coming up soon, trading volumes will slowly dry up and make people even more frustrated. Some chart levels below.
The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis,http://ftalphaville.ft.com/thecut/2011/11/14/744541/look-away-from-our-ecb-says-the-bundesbank/
Barclays’ finance director has called for an overhaul of “opaque and complex” accounting rules that artificially boosted the profits of big European and US banks by billions of pounds in the third quarter of this year. http://ftalphaville.ft.com/thecut/2011/11/14/744521/barclays-asks-for-fair-treatment-on-fair-value-accounting/
Japan’s economy expanded strongly between July and September, returning to growth after three consecutive quarters of decline, according to a government preliminary estimate released on Monday, the FT reports. http://ftalphaville.ft.com/thecut/2011/11/14/744461/japan-lives-gdp-growth-seen-at-1-5-per-cent/
Mario Monti was handed the task on Sunday night of forming an emergency government led by technocrats as Italy’s head of state raced to win broad political consensus before financial markets opened on Monday, http://ftalphaville.ft.com/thecut/2011/11/14/744441/monti-takes-over-your-move-other-mario/