Well last Friday seem like a non-event for the most part. The volatility has additionally started to pull off as implied volatilities begin to move towards statistical. This is not to say that implied are wrong, certainly we can see an increase as any jolt of news could come and send us up or down, however we are in the middle of the Holiday Season and volume has started to drop off. The talk on the airwaves – is about a possible Santa Claus rally, it still could happen – but it not something I would personally place much stock in – in so far as it would be based on light volume and limited perception.
I did get some feedback last week on my observations about what is going on – as per the “man in the street”. One email was very interesting in that they had been measuring the foreclosure sales vs. the amount of 2nd mortgage and equity loan failures. What they noticed was an increase in the percentage amount of the 2nd failure as to the net amount of the loan. Here is a couple of interesting notes, 2nd mortgages (or secondary debt) returned less than 5%, with the vast majority failing. Another email I received was tracking retail rental space vacancy, vs. taxes, vs. avg mortgages, vs. avg. rent per square foot. The conclusion was also fairly negative. Of course these are more local instances in respected areas of the country – but it stands to reason that the events are happening likewise throughout the country to different degrees. The point is that we are all scientist, whether we know it or not. We shop for better price, we observe our neighbors, we adjust travel times, etc. We make informed (or ill-informed) decisions because of our experiences. While some may argue the results – the method has been around with us since man started understanding cause and effect. Those that became famous put it to paper and reasoned the world around us.
I recently received a great book (just finished) called Freakenomics – I highly recommend reading it. The conclusions would seem obvious in several cases – if we just open our eyes. The problem is that instead of seeing, we have become reliant on other peoples data to tell us what is going on, like PPI or CPI, the problem with that data is that it’s methods have changed from administration to administration – so that any year-over-year measurement becomes difficult to analyze. Additionally – the majority of the people that rely on that data, have not even done the math themselves and blindly trust it is correct. The man on the street may feel something completely different – than what the government data is reporting. I would argue that making a detailed observation of the world around you will give better resolution as to the current and future economic landscape than relying on government data, who’s data is historical and methods are consistently evolving. Even the Nobel Prize for Economics, Dr. Granger (after reading my rudimentary essay) said: “What is certainly true, as you point out, is that it is not very helpful if the definition keeps changing. By all means let there be an official value but what the value would have been under previous definitions should always be made available. It is the decision not to do this were political manipulation occurs.” – It doesn’t take an Nobel Prize winner to figure that out – but it sure does help to know if you on the right track if he confirms it.
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China cutting rates fast.
China is cutting interest rates again, 5th time in 3 months, to 5.31%. Most of it stems from the growth slowdown of exports as both the U.S. and Japan are hit by a recession. They additionally are adding a rather large surplus to spur growth domestically as foreign trade declines. However, China has more room to play than others (especially Japan). They are still in a growth rate – regardless of the contraction – as many move from rural areas to manufacturing and service urban areas – thus needing to purchase necessities. However – the larger manufactures which rely on net export sales rather than domestic are seriously hurting some areas – were layoffs are occurring. China is a perplexing problem, since they are going through several different expansions at the same time – tack on that population size and it makes it very difficult to get detailed resolution as to what is succeeding and what is failing.
Certainly export sales are going to hurt, but what of domestic sales? I think we are going to see a mixed economy in China – depending – it will certainly be sector driven. China’s government however is expecting a worst case scenario and tend to be more pessimistic in nature.
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Futures Pre-market
Futures are a little mixed in the pre-market, they were up and then came back off. This is a light volume week, so unless there is a significant spread to fair value – don’t expect much action from the Arb traders – spread is as important as liquidity – never forget that!
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Support / Resistance
We are at or near pivot levels – it’s anyone’s guess as to the move – since price will be driven by light volume.
INDU 8000 (8500) 9000 (We are just above the pivot point and can move higher – if Santa is coming to town.)
NDX 1100 / 1200-1250 (We are still in the resistance band – near the lower range.)
SPX 800 (850) 900 (Again at the pivot point)
RUT 400 (450) 500 (This managed to hold a little better compared to the narrower indices – could it pull the rest higher? Who’s to say)
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Conclusion
These are the times to sit tight, hedge those deltas, and not take a big stance going into the New Year – you may miss out on a Santa Clause rally – if you’re an investor – but so what. 2008 has been about principal protection – not trying to hit one out of the park. Spend some time with family and friends over the holiday. The economy (good, bad, and indifferent) will be here – if your hedged, plan on making this an easy week. Keep it simple.
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