Coffee Reading Material
Unfortunately my last blog "Two Minute Warning" accurately described a classic example of "Good News, Bad Price Action". The current sell off in the Capital Markets is a direct result of Monday June 21st's dismal market performance in the wake of positive news on the Chinese Yuan revaluation.
I will offer a small "tease" within the next week, when my third quarter Capital Market outlook, titled "A Baseball Season of Frustration is in Full Swing", is released. Until then, let me offer some thoughts on what I am watching heading into month end.
Personally I am "underweight" in my holdings. Most of the Hedge Fund managers I speak to are positioned somewhat similarly. It appears the S&P 500 Index is fixated on some important technical levels, as is the Ten Year Treasury, which is fixated on 3%. If the path for both is to price at or below those levels, so be it. More importantly for me would be the ability to "sustain" any decline below 3% in the Treasury or 1025 in the S&P 500 Index.
Source: Bloomberg SP 500 Index
I still believe the market is turning a very large Battleship away from "Junk" toward "Quality", as it did in 2004. I made the point on Fast Money on Monday June 28, that in the second half of 2010, a premium will be paid for the better balance sheet of companies with pricing power retention. Use technology as an example. Apple (AAPL), up over 10% this quarter, or Akamai (AKAM), up over 40%: why? Pricing power retention! Google (GOOG) down this quarter over 15%: why? It has not retained pricing power!
On Financial Regulation, much of the Street and Media chatted about "certainty" being provided on Friday, June 25, I just don't see that. For me three critical questions remain - will there be a Tarp tax, what impact will Basel 3 have and what reform will the GSE's undergo. There remains "uncertainty" in the Financials still.
My focus for Friday's unemployment report will be private sector job growth. That component was dismal last month. This month I expect, and analysts on the street do as well, a recovery in private sector jobs. In fact, analysts are forecasting a jump to 100k.
Private Sector Job Growth
I realize the short term price moves get all the headlines. This week, Oil has reversed from $79 back toward $76. That is not the story. The reality is that the Hurricane approaching the Western Gulf will force workers off Rigs and reduce supplies further from the Gulf of Mexico. The long term impact of the BP spill is bullish, with real price impact felt by the first half of 2011, potentially sooner in Q4 2010.
Finally the Credit Markets always tell the most accurate story for the Capital Markets. For the week of June 21, High Yield Corporate Bonds experienced inflows of over $1 billion. In addition, $20 billion worth of issuance hit the market. That alone gives me confidence my next move will be from underweight back to market weight, not cash.