Thoughts about the markets, automated trading algorithms, artificial intelligence, and lots of other stuff

  • Capitalogix Commentary 10/18/10 – Are Expectations Priced In Yet

    Well, it is possible to dig out of a big hole.

    101016 Rescue Team Cartoon - Parker
    Bernanke Outlines 'Case for Further Action' to Spur Economy Forward.

    Fed Chair Ben Bernanke has some ideas about pumping more money into the flagging recovery to get us out of a different kind of hole.  In talks last week, he clearly presents the case for more action.

    • He predicts a weak recovery and continued high unemployment.
    • Bernanke talks about a mandate-consistent 2% inflation rate — further emphasizing this idea that the Fed will aggressively target positive inflation.
    Barry Ritholz posted a word cloud of the speech.  It speaks for itself.

    101016 Bernanke-speech
    You can read Bernanke's whole speech here.

    According to the WSJ, the Fed sent an even clearer message in its written remarks.  How? Bernanke used italics only four times in the report.  Do those four instances constitute a 'font of wisdom' message from the Fed chairman. Let's look at the message.

    First, Mr. Bernanke said the Fed takes its cues from two primary objectives: the "longer-run sustainable rate of unemployment" and the "mandate-consistent inflation rate." He later made clear what the Fed thinks about both right now: Inflation is "too low" and unemployment "too high."

    That makes further Quantitative Easing pretty much a given, to the relief of investors who have already priced it in with a 12% surge in the S&P 500 since late August.
    However, some commentators (like David Rosenberg) are skeptical about how much of the gain is priced-in already.  His message: Sell the news, Quantitative Easing will do more harm than good.

    Market Commentary

    Even though stocks are overextended after a seven week run, I have not yet seen compelling evidence of weakness that would signal the start of a correction or pullback.

    Nonetheless, I'm watching a few things closely.  For example, we are seeing some negative divergences in the banking and financial sectors.  They have not enjoyed the same success as the rest of the market over the last several weeks, and this may be telling us something.

    101016 Banking Index Under-Performing the Nasdaq

    On the other hand, the Nasdaq 100 Index (comprised of the large capitalization tech stocks) is leading the move higher. The recent strength in this index not only made a new 52-week high last week, it also hit levels not seen since late 2007.  Should the S&P 500 Index follow this leader, the short-term future looks good.

    Business Posts Moving the Markets that I Found Interesting This Week:

    Lighter Ideas and Fun Links that I Found Interesting This Week

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  • The Big Mac Index – A Feast of Burgernomics

    Bigger Big MacImage by Simon Miller via Flickr

    The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say it is arguably the world's most accurate financial indicator to be based on a fast-food item.

    The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac.

    According to this measure, the most undervalued currency is the Chinese yuan, at 40% below its PPP rate.  In China, a McDonald’s Big Mac costs just 14.5 yuan on average, the equivalent of $2.18 at market exchange rates. In America, the same burger averages $3.71.

    The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

    The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

    101016 Big Mac Index

    The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

    Which Currencies Are Beating-Up On the Dollar?

    You know the dollar has been in freefall since the middle of the summer. BusinessInsider posted a chart, from Morgan Stanley, showing which currencies have appreciated the most since then.

    The big winner? The Swedish Krona. Note that the much-hyped yen is just in the middle of the pack.

    101016 Which Currencies Are Beating-Up On the Dollar

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  • The Big Mac Index – A Feast of Burgernomics

    Bigger Big MacImage by Simon Miller via Flickr

    The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say it is arguably the world's most accurate financial indicator to be based on a fast-food item.

    The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac.

    According to this measure, the most undervalued currency is the Chinese yuan, at 40% below its PPP rate.  In China, a McDonald’s Big Mac costs just 14.5 yuan on average, the equivalent of $2.18 at market exchange rates. In America, the same burger averages $3.71.

    The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

    The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

    101016 Big Mac Index

    The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

    Which Currencies Are Beating-Up On the Dollar?

    You know the dollar has been in freefall since the middle of the summer. BusinessInsider posted a chart, from Morgan Stanley, showing which currencies have appreciated the most since then.

    The big winner? The Swedish Krona. Note that the much-hyped yen is just in the middle of the pack.

    101016 Which Currencies Are Beating-Up On the Dollar

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  • Sesame Street Parodies the Old Spice Ad with Grover

    Short, blue and furry could be the next tall, dark and handsome.

    Once again proving it's not just a show for kids, Sesame Street spoofs the wildly popular Old Spice ad.

    Grover preaches the importance of smelling like a monster and of using the word "on" correctly in the parody of the "Man Your Man Could Smell Like" ad featuring Isaiah Mustafa.

    Have a look at the spoof, and the commercial that inspired it.

    Here is the Sesame Street video.


     

    Here is the original video.


     

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  • Sesame Street Parodies the Old Spice Ad with Grover

    Short, blue and furry could be the next tall, dark and handsome.

    Once again proving it's not just a show for kids, Sesame Street spoofs the wildly popular Old Spice ad.

    Grover preaches the importance of smelling like a monster and of using the word "on" correctly in the parody of the "Man Your Man Could Smell Like" ad featuring Isaiah Mustafa.

    Have a look at the spoof, and the commercial that inspired it.

    Here is the Sesame Street video.


     

    Here is the original video.


     

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  • Laurel and Hardy Meet Santana

    This video has virtually nothing to do with business or trading, other than being creative.

    Still, smiling is good  … and laughing is better.  Hopefully, you will enjoy this as much as I did. 

    Watch Laurel and Hardy dance with Santana's "Oye Como Va" as the music track.  It fits surprisingly well.



     

     

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  • Laurel and Hardy Meet Santana

    This video has virtually nothing to do with business or trading, other than being creative.

    Still, smiling is good  … and laughing is better.  Hopefully, you will enjoy this as much as I did. 

    Watch Laurel and Hardy dance with Santana's "Oye Como Va" as the music track.  It fits surprisingly well.



     

     

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  • Capitalogix Commentary 10/11/10 – Until Sellers Get Bold

    Something's got to give – job growth and spending swing in the balance.

    101008 Economic Mood Swing Cartoon - Jeff Parker

    The job loss situation continues to get worse.  This is still one of the scariest charts I've seen.  And the numbers continue their trend of downward revisions.

     

    101008 Job Losses In Recessions
    Market Commentary.

    The markets continue higher despite concerns about the economy.  Remember, the markets do not reflect what is happening in the economy (nor are they supposed to).  Markets reflect the expectations and speculations about the markets themselves. 

    There is a lot of money sitting on the sidelines, and if we don't get selling pressure — then it doesn't take much to push things higher. 

    The S&P 500 Has Risen Back to Its Down-Trend Line.

    The bigger picture shows that the S&P 500 Index has rallied back up to the trend-line from its 2007 highs.  Bulls will likely feel more confident if price can stay above this level.

    101009 SP500 at Trend-Line

    How high can it go?  This is a likely area for Bears to try to sell.  Not only are we at overhead resistance, but the market is getting overbought.

    How Can You Measure Whether the Market Is Overbought?

    More than 88% of all stocks traded on the NYSE are above their 50-day moving average.  We have seen similar levels three times in 2010, all resulted in large sell-offs. 

    101008 Percent of Stocks Above 50-Day Average

    The push higher will continue until sellers get more bold.

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Propelling the Profit Comeback – Big Earnings From Lower Revenue. (WSJ)
    • Wall Street’s Profit Engines Are Slowing Down. (NYTimes)
    • Bernanke Says Fed's Additional Asset Purchases Improve Economy. (Bloomberg)
    • Where Every Major Country Is in the Global Debt Cycle. (BusinessInsider)
    • Just Manic Enough – Seeking Perfect Entrepreneurs. (NYTimes)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week

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  • Capitalogix Commentary 10/11/10 – Until Sellers Get Bold

    Something's got to give – job growth and spending swing in the balance.

    101008 Economic Mood Swing Cartoon - Jeff Parker

    The job loss situation continues to get worse.  This is still one of the scariest charts I've seen.  And the numbers continue their trend of downward revisions.

     

    101008 Job Losses In Recessions
    Market Commentary.

    The markets continue higher despite concerns about the economy.  Remember, the markets do not reflect what is happening in the economy (nor are they supposed to).  Markets reflect the expectations and speculations about the markets themselves. 

    There is a lot of money sitting on the sidelines, and if we don't get selling pressure — then it doesn't take much to push things higher. 

    The S&P 500 Has Risen Back to Its Down-Trend Line.

    The bigger picture shows that the S&P 500 Index has rallied back up to the trend-line from its 2007 highs.  Bulls will likely feel more confident if price can stay above this level.

    101009 SP500 at Trend-Line

    How high can it go?  This is a likely area for Bears to try to sell.  Not only are we at overhead resistance, but the market is getting overbought.

    How Can You Measure Whether the Market Is Overbought?

    More than 88% of all stocks traded on the NYSE are above their 50-day moving average.  We have seen similar levels three times in 2010, all resulted in large sell-offs. 

    101008 Percent of Stocks Above 50-Day Average

    The push higher will continue until sellers get more bold.

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Propelling the Profit Comeback – Big Earnings From Lower Revenue. (WSJ)
    • Wall Street’s Profit Engines Are Slowing Down. (NYTimes)
    • Bernanke Says Fed's Additional Asset Purchases Improve Economy. (Bloomberg)
    • Where Every Major Country Is in the Global Debt Cycle. (BusinessInsider)
    • Just Manic Enough – Seeking Perfect Entrepreneurs. (NYTimes)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week

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  • Capitalogix Commentary 10/04/10 – When Up Isn’t Really Up

    What does it mean when the President's chief enforcer bails?

    101003 Rahm Bails - Cartoon By Ramirez

    Rahm Emanuel, President Obama's chief of staff, quit to run for Chicago mayor.  Peter Rouse, a senior aide, takes Emanuel's position. Rouse, was Obama's chief of staff when he was a U.S. senator from Illinois.  Saturday Night Live wasted no time putting its spin on the situation.


     

    Likewise, Obama's finance guru and Treasury Secretary, Larry Summers, recently resigned.  Do you think either of these moves will materially affect the market?

    Market Commentary

    The Dow Jones Industrial Average is experiencing a "golden cross".  That means the 50-day moving average crosses above the 200-day moving average at the same time that both moving averages are rising.  This will be the first "golden cross" that the Dow has seen since December 1st, 2005.

     

    101002 Dow Decision Level
    So, how bullish is that pattern? While the "golden cross" is thought of as a positive technical indicator, the historical numbers tell a different story.

    Also dampening bullish spirits, the market indices put in a classic bearish outside reversal day last week.  That means price starts high, but closes near the low of the day.  This pattern is often seen near market tops.  It occurred right at the resistance level from the May highs, with the market relatively overbought.  While MACD shows waning momentum, don't let a pop higher here surprise you.

    Have You Looked at the U.S. Dollar Recently?

    The third quarter was a boon for stocks, but it was a bust for the US dollar.  Since peaking on June 7th, the US Dollar Index has pretty much gone straight down for a decline of 11.62%.  Here is a chart.

     

    101002 US Dollar Over Last Six Months

    Meanwhile, the price of Gold is soaring.  And gold is arguably the least biased form of money.  Consequently, many consider it to be the ultimate store of wealth (and hence, a good measure of relative value).

    So, When Is Up Not Really Up?

    Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. This next chart caught my eye because it shows our big rally (since early 2009) is less than a 10% rally (when it is measured in Gold instead of Dollars).

     

    101002 Dow Priced in Gold
    The Dow/Gold Ratio chart shows the ratio of the price of the Dow to the price of gold. Another way to look at it is the number of ounces of gold it takes to buy one share of the Dow. For example, with the Dow at 10,000 and gold at $1,000, it would require 10 ounces of gold to buy one share of the Dow; so the ratio would be 10. The chart shows that at the recent market lows it took 7.5 ounces, and now it takes 8.21 ounces of gold to buy the Dow.

    This chart highlights one reason that a weak dollar matters.  While the Dow is much higher in dollar terms, it is still declining when priced in Gold.  This indicates that the strength we have seen is more a function of a weaker dollar rather than a real increase from real demand.

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Did One Bad Trade Cause the Flash Crash? (Economist & SEC)
    • Lots of Tech Mergers Is A Positive Sign – Who Is Next? (Forbes)
    • Facebook's IPO Likely In Late 2012. (Reuters)
    • Is China's Growth Sustainable, Or Are Strains Showing? (TheWeek)
    • 10 Habits of Mind for Investors. (Big Picture)

    Lighter Ideas and Fun Links that I Found Interesting This Week

    • Did the West Attack Iran's Nukes… With a Computer Worm? (TheWeek)
    • VMware's Chief on the 4 Types of Leaders Companies Need. (NYTimes)
    • WSJ's 2010 Technology Innovation Awards. (WSJ)
    • Does Grunting During Tennis Create An Edge? (Kedrosky)
    • Digital Fitness Trainers That Know How to Motivate. (NYTimes)
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