Follow the Yellow Brick Road
Friday's December jobs report provided a much needed reminder that the FOMC will stand by its accommodative policy for an extended period of time. For all the criticism Ben and his boys have taken this week, they have accurately assessed and addressed the stresses in the economy and the capital markets. Take a look at a portion of text from the December 16th FOMC meeting:
"Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales".
I highlight the continued improvement in Initial Jobless Claims as evidence that the labor market deterioration IS IN FACT ABATING
As of the close of business on Friday, January 8, the S&P 500 Index is +2.68%. The VIX is down 16.375%. The capital markets do not generally decline when the VIX makes such a dramatic drop. The reflation asset trade keeps chugging along, boring as it has become, but yet a continued outperfomer. Global cyclicals remain a viable theme; it will be time to play the defense names later in the year.
The comfort assets of 2009 appear to be making a rather seamless transition into 2010; they were certainly favored last week. Natural resource favorites coal and steel surged over 15% in the first week of 2010. Pundits can't blame a falling dollar any more for the rise in commodities and natural resources, as the dollar vacillated on either side of unchanged all week. For the year, the dollar index is minus half of one percent. Actual global demand is behind the strength in those names. To that point, I expect China's GDP to surprise us all well above 10%.
The Week Ahead
Earnings season begins this week with Alcoa, Intel, and JP Morgan. I can't pick NFL game winners very well, so I won't give that a try, but I will try my hand at forecasting the earnings results for those 3 big boys - I like a clean sweep 3 for 3 - all earnings upside surprises.
Finally, the strategy
It is very difficult to continue following the same path - human nature tends to continually tempt us to change course. However, the seamless, "boring" transition from 2009 to 2010 is underway - so just keep "following the yellow brick road," with comfort asset friends - corporate bonds, natural resources, emerging markets and commodities.