Thursday, March 4, 2021

Morning Note: Separating Signals from Noise

Recall from yesterday:

"...should inflation continue to rear its ugly head, and the bond market continue to act accordingly (selling off, pushing interest rates higher), the Fed will step in with all barrels and become the disinterested (in terms of not out to earn a profit) investor (manipulator) of last resort and buy those interest rates right back down to the proverbial floor."

Economist Peter Boockvar, in his note this morning, more or less picked up where we left:

"Chicago Fed President Charles Evans late yesterday was all over the place in his thoughts. He’s not thinking about yield curve control but he would consider it. He is not concerned with the rise in long rates but he would consider buying longer term bonds but is not thinking about it now. What this reflects is someone who is constantly thinking about how to distort and manipulate the US Treasury market. There is no free market bone here, only how best to price fix the most important price in the world, the cost of money."

Fed Chair Powell will be on the stage this morning, the markets of course will be hanging on his every word.

Asian equities had a rough night last night, with 14 of the 16 markets we track closing notably lower.

Europe's not fairing much better so far this morning, with 12 of the 19 bourses we follow currently in the red.

U.S. major averages are all over the place to start the day: Dow up 48 points (0.14%), SP500's down 0.20%, SP500 Equal Weight's down 0.21%, Nasdaq 100's down 0.77%, Russell 2000's up 0.31%.

The VIX (SP500 implied volatility) is up 0.22%. VXN (Nasdaq 100 i.v.) is up 3.33%.

Oil futures are up 1.21%, gold's up 0.04%, silver's  down 0.62%, copper futures are down 2.79% and the ag complex is up 0.06%.

The 10-year treasury is up a fraction (yield down a fraction) and the dollar is up 0.22%.

Let by AT&T, energy, consumer staples, utilities and India -- but dragged by the likes of miners, base metals, tech, emerging market equities and materials -- our core mix is off 0.17% to start the session.

Allow me to muse a bit this morning...

From Tuesday morning's featured quote:
"...popular math tools and risk models are incapable of sufficiently preparing investors for large and highly unpredictable deviations from historic patterns—deviations that occur more frequently than most models suggest."

"“What you’re really modeling is human behavior,”
Yes, we can talk price to earnings ratios, market cap to GDP. We can discount cash flows. We can crunch macro data till we're blue in the face. We can measure volatility in markets back a century and look for patterns that correspond with history's major market moves. We can measure flows into and out of equities daily, weekly, monthly, yearly. We can read sentiment surveys, measure spreads between those who say their bullish for the next six months and those who say their bearish. We can carefully chart the difference in yields of low quality corporate bonds versus super-safe treasuries. We can track daily volume in equities, compare up volume versus down, we can track the daily gainers versus the losers, up sectors, down sectors. We can track purchasing manager surveys, chart the costs of commodities across the spectrum. We can perform technical analyses on everything we hold in client portfolios, and a myriad of things we don't... on and on and on...

We can do all of the above (which we do), and so much more (which we do), and when it's all said and done, we're simply monitoring human behavior, forming hypotheses, and investing accordingly.

So why all the effort? Don't I always say that human nature never changes? 

Well, sure, based on my studies of human investor nature over literally centuries, I conclude that indeed, folks tend to act in similar ways at the ends, and at the beginnings -- and in the middles for that matter -- of long market up and down cycles. But, of course, it's all about the timing, and forever working to separate the signals from the noise (wherein those "deviations" mentioned in the above quote occur).

And, man, my friends, markets are mighty noisy these days!

Stay tuned.. and stay hedged!

Have a nice day!

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