Range Roving

Yesterday’s rapid (or should I say vapid?) market move up was met with what seemed to be a universal WTF?? Some pointed to the extension of Fed liquidity programs as a reason but that announcement came out post the move and the market travelled only steadily East after that. I couldn’t see a reason for it then and still can’t now. To be fair, the GDP number was revised slightly better but the jobless claims certainly came in worse. Anyway, it went up, end of story. Unusually, with equities rallying, bonds had a strong bid too with the 7 year auction coming in better than expected with a bid to cover of 2.82 vs an average of 2.35.

The economics today were poor however. Although the Personal Income was up, this was due to transfers under the stimulus plan. Crucially private wages were down $12.4bn vs -0.7bn previously. Wage deflation is not going to help the economy or the argument of the Inflationistas. Interesting to see that in spite of the transfers and bigger overall number, personal consumption came in bang in line with expectations. This extra money is being saved not spent…the savings rate at 6.9% is the highest since Dec 1993. The VIX fell back to the 26 level, the lowest it has printed since 12 September…so are we getting too complacent with our levels? Perhaps not, maybe we’re actually too bearish. The Bull/Bear Index continues to tick steadily up and is often seen as a good contraindicator. The last two weeks has seen us range trading again albeit in a parallel and lower range than the 2 weeks before.
I’m wondering what the catalyst is to get us going again, one way or the other. Earnings aren’t too far away now and with 2/3 of companies beating at the net level last time round, it will be interesting to see how many can maintain this, and more interestingly, where these beats come from. Last quarter, 2/3 actually missed at the revenue lines and the difference was made up through cost cutting. How much of this has been done, how much remains? Or can companies actually deliver strong revenues this time and see that flow through to the bottom line? Given the negative comments from CEOs and the sky high rate of insider stock sales, I wouldn’t bet my "not soon to be inflated out of mortgage" on it.